I was recently having a
discussion with a friend who had just finished reading about the investment
strategy of Warren Buffet (he is considered as the world’s best investor). My
friend was amazed to find out that Warren Buffet knows to a large extent the
details of the operations of any business in which he invests. In fact, it is
said that, he personally visits any company he wants to invest in to find out
how things are done there. According to Buffet, he does not invest in any
business which he cannot understand. These findings led amazed my friend and
led him to ask me a simple question: “do all investors go through this trouble
in deciding where to invest?” It is this question from my friend which has
inspired this post.
Basically there are 2 types of
investors – the Fundamental Investor and the Technical Investor.
Fundamental
Investors
Fundamental investing is considered
as the “cornerstone of investing”. Investors who fall into this category make
use of a number of mathematical tools. They study financial statements and the
factors that affect a company’s actual business. Fundamental investors are
interested in ratios such as profitability, liquidity, leverage, etc. These
ratios inform their decision to either purchase an investment or not.
The greatest assumption of the fundamentalist
is that: stocks do not trade at their real or intrinsic value however; in the long
run a stock’s price will hit its intrinsic value. This is what motivates them
to undertake all the mathematical calculations to determine the true or intrinsic
value of a stock. It is that intrinsic value which would inform them about
whether the stock is actually over-valued or under-valued and whether they
should buy the stock or not.
Watch this space for the
continuation of this post: Technical Investors. #Keep Investing
Author:
M.D. Avor
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