Fundamental analysis is one of the most widely-used market approaches. It provides investors with sufficient amounts of insights about a company’s performance. It gives them deeper understanding of a stock’s performance and behaviour.
Nonetheless, it is still subject to criticisms and scrutiny, especially to those that do not believe in the efficiency of fundamentals.
Let’s take a look at some of the primary tenets, as well as the most popular criticisms, of fundamental analysis.
What is a stock’s intrinsic value?
The ultimate goal of fundamental analysis is to determine a stock’s intrinsic value. The intrinsic value is basically the ‘real’ or ‘actual’ value of the business or company that underlies the stock. And to find the intrinsic value, fundamental analysts put into consideration several factors, both quantitative and qualitative, that tell them whether a stock is overvalued or undervalued.
Basically, when a stock’s current market value is higher than its estimated intrinsic value, it’s overvalued. On the flip side, if the Forex Daily Info current market value is lower than its estimated intrinsic value, it’s undervalued.
The obvious course of action is to buy undervalued stocks and sell overvalued stocks before the market finally reflects their true values.
Though it sounds simple, determining a stock’s intrinsic value isn’t as easy as it sounds. Among the factors you have to consider are the company, the management, the industry where the company falls under, macroeconomic events and changes, and financial statements.
The Problem with Intrinsic Value
Fundamental analysis is widely used among investors and analysts. In fact, much of what Wall Street does is about fundamental analysis.
However, this doesn’t mean that fundamental analysis doesn’t have any problems. And for this part, we want to ask ourselves: what problems are we faced with when it comes to intrinsic value?
There are apparently two main problems: accuracy and timing.
First, we do not know how accurate our estimate of the intrinsic value is. Even if dedicate much time and effort, we are still not infallible to miscalculations and misguidance. If our estimate of the intrinsic value is inaccurate, we may never see the time when the market reflects the stock’s real value. That being said, we got the second problem.
It’s about the Brokers Review market timing. When will the market reflect the stock’s real value? The answer is this: it can take a few days, or a few months, or a few years. This means that we are never sure. However, extensive and further analysis may give us some hints, such as the most favourable conditions in which the market will finally realize a stock’s real value.
To wrap things up, we’re going to say that fundamental analysis is here to stay. It works best for patient and disciplined investors who have longer time horizon.
Even so, we’ll still briefly mention the criticisms toward fundamental analysis.
The first obvious critics are those that use technical analysis. These people hold that the price movement and momentum are more important than fundamentals. Everything has happened before, and all you have to do is to follow a stock’s price movement’s trajectory. Find an ideal entry and exit point, and earn some money.
The second criticism comes from the proponents of the efficient market hypothesis, which tells us that the market reflects all available information about the stock. This implies that we can never beat the market in the longer run since everything is priced in.