Stock Market · Fundamental Analysis

Why fundamental analysis exists

Technical analysis reads price charts. Fundamental analysis reads the business behind the stock. It answers one question: is this company worth more or less than what the market is currently pricing it at?

The premise

Every stock has two values:

• Market price: what Mr Market is willing to pay today
• Intrinsic value: what the business is actually worth based on its earnings, assets, and growth

In the short run, price diverges from intrinsic value, sometimes dramatically. In the long run, price converges to intrinsic value.

> In the short run the market is a voting machine; in the long run, a weighing machine., a foundational value-investing maxim

What FA tells you

FA helps you answer:

• Is this company growing its earnings consistently?
• Is it profitable? Does it generate real cash?
• Is the balance sheet strong or drowning in debt?
• Does management deploy capital intelligently?
• At the current price, is this company cheap or expensive?

FA vs TA: different questions

FA: What should I buy? (value and quality)

TA: When should I buy it? (timing and entry)

The best investors combine both. The most successful long-term investors buy fundamentally excellent businesses (FA). Many add a TA filter to enter at better prices.

Long termFA predicts where prices converge

Short termTA tells you the path to get there

Where to start

Every FA journey begins with a company's annual report. The single most important document any company publishes. It contains the P&L, balance sheet, cash flow statement, and management commentary. Everything else is derived from these.

Takeaway. Fundamental analysis finds the gap between intrinsic value and market price. In the long run, stock prices converge to business value. FA helps you find undervalued quality businesses.