Fundamentals

Sometimes stock market analysts are grouped into broad categories--fundamental analysts and technical analysts. Fundamental analysts study the fundamentals of a company, such as its sales, pre-tax profits, earnings per share, dividend growth, indebtedness, book value, price/earnings ratio, etc.

Technical analysts study the price movement of the stock, looking for "support" levels (a price at which significant buying is expected should the stock drop to that point) and "resistance" levels (a price at which significant selling is expected should the stock rise to that point). A technical analyst looks for stock price momentum to determine whether to buy or sell. This decision may be made without asking whether the company is a good long-term investment (based on the fundamentals).

Technical analysis is sometimes part of a larger strategy called "market timing" that considers both the price movement of the individual stock and the momentum of the company's sector or the broad stock market. Both individual stocks and the broader market tend to swing up and down within various ranges, either trending upward (in a bull market) or trending downward (in a bear market). Sometimes, if an individual stock is strong enough, it can "buck" the broader trends and either hold its own or show price gains even in a bear market. Also, if a company is doing poorly, it's price may be flat or decline even during a bull market. A market timer seeks to buy a stock at or near a bottom and sell a stock at or near a top. I'm not smart enough to call tops and bottoms of markets and (for me) this distracts much-needed brain cells from what I believe is a more important task: identifying good long-term investments.

An extreme form of market timing is called "day trading," where someone may buy and sell the same stock on the same day, trying to "lock in" a small gain on the transaction. This is a labor-intensive, all-consuming enterprise that looks only at the numbers. A day trader may have no idea what the company does. He or she may be acting on a news report or a recommendation from a service that provides up-to-the-minute day trading recommendations. I understand the concept, but this usually requires putting very large amounts of money at risk in a single transaction in order to make a few cents on a trade. My central nervous system isn't wired for day trading.

A fundamental investor is less concerned with the day-to-day (or minute-by-minute) up and down movement of a particular stock or the broader market as long as the company's fundamentals continue to look good. Sometimes a major bear market (like the one we experienced in 2008-2009) gets the attention of both fundamental and technical analysts because a severe economic downturn may damage a company's fundamentals as well as causing a strong downward movement of an individual stock and the broader market.

Around 1995, I became interested in real estate investment trusts because I believed their dividends would provide some price support in a market that seemed to me to be getting overpriced. Around 1997 and 1998, I began to move some money within my pension fund account out of equities into a more defensive blend of bonds and other fixed-income investments. The market continued to climb until March, 2000, when it peaked in what came to be known as a "high tech" bubble, when technology stocks peaked. I missed two or three years of the market's upward momentum by avoiding tech stocks altogether and cutting back on my exposure to the broader stock market. I was early but my sense that the market was overheated proved to be correct. (One didn't have to be brilliant to recognize the frothiness of that bull market. Many people recognized it but were content to hang on for the ride.) That movement of funds (in the late 1990s) out of the broader stock market into REITs and other fixed-income investments was the only time since 1982 that I felt like I was thinking and acting like a "market timer." It wasn't very sophisticated. I was simply fearful and looked to dividends for some degree of security. I identified with Charles Allmon's reply when once asked if he was a "bull" or a "bear." He said, "Neither. I'm a chicken."

My general approach has been to follow the NAIC principles of looking for growth companies (based on fundamental analysis), investing regularly regardless of market conditions (disregarding the advice of market timers), reinvesting earnings and dividends, and diversifying by size and industry.

Since I began investing in the stock market in 1982 there has been a large increase in the number of media outlets covering the financial markets. The Internet has made a vast amount of data available to everyone. The competitiveness of the financial news business has led to an increase in the amount of "technical analysis" advice. Analysts are commonly asked whether "this is a good time to buy" a particular stock or stocks in general. There has been increasing interest in the short-term prospects for the broader market. Much of the buy or sell advice sought and given in the financial news media is irrelevant to someone with an orientation toward fundamental analysis and an approach that looks for good long-term investments.

I don't pay attention to short-term "technical" indicators. I don't try to "time" the market. I try to stay focused on the fundamentals of individual companies.