Table of Contents
1.1 Brief description
Fundamental analysis is used to understand any business. _ _ _ _ _ If an investor wants to invest in the market for a long time, then he should understand the business in which he is investing. Fundamental analysis helps in this task of seeing and understanding the business from many angles. Does _ It is important for an investor to separate himself from the day-to-day noise of the market and look at the working of the business. The share price of fundamentally strong companies tends to increase over time and the investor benefits. _ _ _ Many such examples in the Indian market
are like Infosys , TCS, Page Industries , Eicher Motors , Bosch India , Nestle India , TTK Prestige etc. Each of these companies has delivered an average compound annual return ( CAGR ) of over 20 % over ten years. You can think of it as _ _ Every investor’s money was doubling in 3.5 years. _ _ _ _ The higher the CAGR return, the faster your capital will grow. Some companies like Bosch India have given a CAGR of up to 30%. So now you must have understood that fundamentally strong _ _ _ How fast and how much money can be earned by investing in companies. _ _ You can get an idea of how wealth grows over a long period of time by looking at the charts of Bosch India, Eicher Motors, and TCS Ltd. given below. Remember that for the Indian market
These are just three examples out of many.
You might think that I am just showing nice charts. _ You must be wondering what the charts of Suzlon Energy, Reliance Power, and Sterling Biotech would look like. See these too.
These are just three examples of many money dumps. _ _
To earn money, it is important that you recognize the difference between profit-making and loss-making companies. _ Every earning company has certain qualities that make them stand out. _ _ _ _ Similarly, money laundering companies also have some special identity, and _ _ _ A good investor recognizes that. Fundamental analysis is the technique that gives you confidence in identifying the right company for long-term investment. _
1.2- Can I become a fundamental analyst? _
You absolutely can be. It is a misconception that only chartered accountants or those with a commerce background can become good fundamental analysts. To become a good fundamental analyst, you just need to learn a few things. ,
- understanding financial statements _
- Every business has to be understood from the perspective of its industry
- need to know basic math
In this chapter, we will learn the first two things from the above list, which will lead us to fundamental analysis.
1.3 – I know technical analysis, what is the need to understand fundamental analysis?
Technical analysis gives you small profits. It tells you the exact time of entry and exits into the market. But this is not the right way to increase wealth. You can become rich only if you make good long-term investments. Well, it would be good that your technical analysis and fundamental Use both analyses. _ To understand this, let us once again look at the chart of Eicher Motors.
Suppose an investor invests in Eicher Motors considering it a fundamentally strong stock. He invested money in the company’s stock in 2006, as you can see in the chart, the stock did not make much money between 2006 and 2010. The rally in the stock started only after 2010. This also means that Eicher Motors did not give good returns to the investor in this investment made on the basis of fundamental analysis. Between 2006 and 2010, this investor could have made more profit if he had made smaller trades. Technical analysis is beneficial for such short trades. That is why you should use technical analysis and fundamental analysis together. This is based on an important strategy of investing money which is called The Core Satellite Strategy.
Suppose an investor has ₹ 500, 000. He divides it into two parts, for example in the ratio of 60% and 40%. He invests 60% of this amount i.e. ₹ 300, 000 for the long term, and for this, he finds a fundamentally strong company. This investment of ₹300,000 forms his core portfolio. You can expect the core portfolio to grow at a CAGR of at least 12 to 15% each year based on that. The remaining 40% money i.e. ₹200,000 can be used for short-term trades using technical analysis techniques. This is called satellite portfolio and in this too one can expect 10 to 12% returns.
1.4 Tools of fundamental analysis
The tools used for fundamental analysis are very simple and are freely available to all. For this you need :
- Company’s Annual Report – All the information you need for fundamental analysis is in the company’s annual report ie the annual report, you can download it from the company’s website.
- Industry-related data – You also need industry-related data to know how the company is doing. This data is also available free of cost. For this, you have to go to the website of that industry association.
- Track news or news – Every day’s news keeps you informed about the company, the industry, and the economy. A good newspaper or news channel can work for you.
- Microsoft Excel – Although it is not free, it is very important for your fundamental analysis calculations.
With the help of these four tools, you can do a fundamental analysis and it will not be less than the analysis of any other fundamental analyst. Research departments of big companies also work in the same way and they also try to make their research simple and logical.
Highlights of this chapter
- Fundamental analysis is used for long-term investments.
- Investing in a company with sound fundamentals helps in the appreciation of your capital or wealth.
- Through fundamental analysis, you can know the difference between a good company ie an investable company, and a bad company.
- Every company worth investing in has some of the same qualities that are seen in all good companies, in the same way, that every bad company has some of the same qualities that are seen in every bad company.
- Fundamental analysis helps you identify these qualities.
- A good strategy in the market should use both technical analysis and fundamental analysis.
- You do not need any special skills to become a fundamental analyst, you just need to have common sense, practical intelligence, a little math, and know how business works.
- The core-satellite approach is a good strategy to invest money.
- The tools required for fundamental analysis are very simple and are freely available to all.