FUNDAMENTALS OF INVESTING

Most investors are aware that it’s important if not necessary to research a company’s business fundamentals before deciding to invest in its stock. This involves exploring each prospective company and its business inside and out. After doing the work to determine a company’s growth prospects, the amount of risk involved, and the upside potential, only then should you spend your hard earned capital. Fundamentals determine whether a company is undervalued relative to where it is trading, or overvalued, and what shares should reasonably be worth, or may be worth in the future. 

You must look at the executive management team and their track record to determine if you are comfortable that they can achieve their business goals. You must also consider the overall stock market outlook and expectations for the industry that your company participates in. In other words is your company in the right place at the right time?

You must review their financial statements to determine if they have enough capital to keep going and growing. Is their debt manageable or will they have to continually borrow or issue stock (thereby diluting your ownership) just to pay the rent?

Every investor should consider fundamentals! Investing is different from speculating because it requires research and analysis, which takes time and patience. Speculators tend to get caught in the momentum of stock price changes and volume (trading action) and often times ignore the fundamentals. Trading action tells them whether to buy or sell. In other words speculators have a short-term outlook and often employ a “herd” mentality. They tend to do what everyone else is doing. Who wants to buy a falling stock? If the fundamentals are good, the successful investor will buy and hold, while the speculator buys, sells, and moves on.

The key to successful fundamental investing is to determine a good buy point and being a disciplined buyer. You can buy low and sell-high, or you can buy and hold waiting to sell when the stock when it becomes overvalued. The key to successful speculating is to buy-high and sell-higher quickly and to cut losses early to be able to trade another day.

Fundamental investing is easier when it comes to investing in large corporations with long track records of growth of sales, earnings, dividends, market recognition etc. Most major Wall Street firms cover the world’s largest companies. The problem is this does not help the small investor who wants to buy a promising new company for its growth potential. Everyone would like to own Microsoft stock at 1985 share prices with 2008 fundamentals, but in today’s market there are no secrets among big companies.

Investment newsletters feature micro and small cap stocks and often talk about glowing fundamentals. Often times the companies mentioned don't have sound fundamentals. This implies higher risk and a greater level of speculation going forward. Some newsletters are great at uncovering overlooked promising growth stocks. It’s important not to be fooled by talk about fundamentals, especially if they haven’t quite developed yet. What they usually refer to, as fundamentals, are expectations and buying momentum.

Momentum trading is a technical term for determining worthy stocks based on the trading action. Momentum trading assumes the market action of a stock is indicating something shareholders need to know. It assumes the market is the truth teller of a stocks real value. If a stock is moving up or down on big volume a momentum trader does not wait for news, to buy or sell.

Why Read A Financial Newsletter?*

Investment newsletters occupy a unique and valuable niche within the financial advisory industry. They often are small operations centered on one individual: their editor or an advisor. Their primary distinguishing characteristic is agility in responding to market trends.

This is why investment newsletters stand out from Wall Street. Huge overheads, decision-by-committee, and a herd instinct, for example, plague the major Wall Street institutions. For them, innovation and flexibility is next to impossible.

As legendary investor Peter Lynch put it in his best-seller ONE UP ON WALL STREET, "Under the current system, a stock isn't truly attractive (to an institutional investor) until a number of large institutions have recognized its suitability and an equal number of respected Wall Street analysts have put it on the recommended list. With so many people waiting for others to make the first move, it's amazing that anything gets bought." He concludes: "If you invest like an institution, you are doomed to perform like one."

Why is flexibility in responding to changed market conditions a virtue? Because the markets are quick to discount--and thus eliminate--strategies that otherwise would continue to beat the market. It's rare for an investment approach to work forever. More typically, a promising strategy works for a while--until everyone hears about it, jumps on the bandwagon, and it finally stops working. More often than not, as investors climb off that bandwagon, they find that it was an Investment Newsletter that had been there first.

This doesn't mean that all investment newsletters beat the market, as is also true of mutual funds and professional money managers, most of them don't. But we all are better off for their trying, since in the process we discover those promising new strategies that otherwise would have gone unnoticed. "Investment letters are the guerrilla troops of the financial world," writes Forbes senior editor Peter Brimelow in his classic work on the investment letter industry, WALL STREET GURUS. "By following them, and halting if they terminate in a smoking crater, you can see what techniques work."