Questions about the method of investing ins stocks

[tomhunter]

Hi

Im reading about investing in stocks and the place im reading suggests that being a
sucessfull investor is all about finding undervalued business's and buying into them.

Although wouldn't it also be about buying business's which for one reason or another you think have
a bright future such as the market they are in. As opposed to just on the intrinsic value
you put on the business by looking at earnings and assets/debt.

Or is my confusion in the fact that in valueing a business investors consider the market
and how they expect them to perform in future rather than just the above.

Thanks

Take this quote from the source

"Fundamentals are the bottom-line, nuts and bolts of a company.
They tell you how much money the company made, how many assets it has, how much
debt it has, etc., so you can value the company and decide what it's really "worth"."



I guess what i don't understand is, is the only way that sucessfull investors operate
through this method of finding undervalued companies or are there other things.

For example would it be true to say that an investor make money without looking into buying an undervalued company through the natural growth in the value of all companies in the stock market.(assuming generally in the long term companies in the stock market generally grow in value) And this method of finding undervalued companiesis just a way of increasing gains from the stock market and beating the rise in the index.


Here is a link to the site i got this information from and the articles im reading which led me
to these questions
http://beginnersinvest.about.com/cs/investinglessons/l/blles2intro.htm

 

[maolivie]

My view on fundamentalism is that it might give you the EXACT present value of a security, but what good is that? Okay, so you can tell if it is undervalued or overvalued. To me, I am more interested in future trend. I can careless if a company is overvalued, or undervalued. But as long as I know the long or short term trend is up (with no chart patterns or indicators suggesting otherwise), I invest. Through this, I can become profitable whether a market is going down or up.

The problem with fundamental analysis (and correct me if I am wrong, since I am not a fundamentalist) is that there are so many charts that are evident of a crash or rise that will happen, and be indicated sometimes up to years in advanced. This to me suggests that using technical analysis we could have noticed these indicators. Fundamentists could have seen many technical indicators that represent a buy, as a sell. They would have missed out. For example, a simple 1-2-3 Top indicator (what some technicians use) is present in the late 90's I believe for the Nasdaq. This signifies a turn from a bull to a bear market. So WELL before 9/11 even happened, we knew the market was going down. WHY? Because technical analysis is the theory that current and future price is already reflected in the trend. Before news breaks - trend changes. Before corporate decisions are made - trends change. People know things. These people are the large investors - or the smart money

There are also cons to technical analysis - for instance, many contradicting signals can be present on a chart. This leaves the investor that doesn't have that much experience in technical analysis with a blank mind. And there are obviously more cons for both techys and fundys, but thats why there are still 2 methodologies around

I am making a new site on this as well with real historic chart examples. I will let you know when it is up. currently my site right now is low budget, and it is only promoting my guide to chart indicators that work very accurately. I plan on combining the current site with my new, more professional and attractive, site that will be more informative and educational.
I'll reply with a new post so you can check out these examples I speak of.

Another example that I just thought about would be Enron. If they forged their books, would the fundamentalist think the company is still undervalued even though that the stock was plummeting well before the company declared bankruptcy, and the scandalous news broke out?

 

[fibonelli]

I think a mix of fundamental valuation techniques and technical analysis is the best method imho. For example, back in Aug2006 Vodaphone was around 110p. Fundamentally it was undervalued in terms of divi yield, p/e ratio and price to free cash flow. Technically there was divergence in two price oscillators and one volume oscillator and there was extensive support around 110p.

If you do practice fundamental analysis, you must read the report and accounts from the back to the front.

 

[maolivie]

This is true. I myself do not care for oscillators and their overbought/oversold indicators due to the simple fact that anything can stay in an over__ state for months before it crumbles or rises. Think of market bubbles, and their immediate cliff dives after an ascent. Some of the ascents begin with overbought indicators. Therefore, some of the greatest gains are parallel to overbought states! So in reality, they can be very unreliable for long term traders.

I, on the other hand, would use an oscillator not to determine over__ states, but to discover divergences for confirming the shift from a bull to bear market, or vice versa, and short term trend changes.

 

[Glenn]

A few suggestions from an old'un.

1. You talk about investing, but don't mention your timeframe. Days, weeks, months, years etc.

2. Use a top-down approach. It's no good buying shares in a bear market. "When the tide goes out in the harbour, the good ships go down along with the bad".
Know which way the tide is running before you set sail.

3. Oscillators are for trading consolidations, not for trends. That's why they stay OB or OS once a trend gets going. Markets consolidate 75% of the time and trend 25% of the time on average.

4. Some of the most reliable shares to invest in are Growth companies with the right fundamentals in a bull market. Read "The Armchair Investor" by Bernice Cohen.

5. You can often make more money in a company which pays a good dividend (but not too good!).

6. Cut your losses and keep your capital to re-invest.

7. Don't get married to a share/company. Court it, scr#w it if you can, but don't marry it.

8. There's always another bus coming.

imho.
Glenn

 

[maolivie]

Thank you for teaching me the basics which I did not know.

However, I like to use oscillators for trend...they happen to be better for calling trend direction then what they actually were developed for -calling what is overbought or oversold.

And to answer your other questions, yes we did talk about timeframe.
1) some of the best rallies start from the fallacy of an oscillator.
2) some of the best short term trades are used from daily divergences

none are 100% effective, so use them in conjunction with your other knowledge, and/or together to confirm or unconfirm a trade.

That is all you need to know.