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 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