Fundamental Analysis

The Fundamental Analysis: Fundamentalists believe the market in only 10% psychological and 90% logical and care little about the pattern of past price movement. They are concerned with determining a stock's value, based on expected growth rates of earnings and dividends, interest rates, and risk. If they believe the intrinsic value of a security is above the market price, the investor is advised to buy. The semi-strong and strong forms of the efficient-market hypothesis attack fundamental analysis. A news event such as an announcement of an unexpected large increase in earnings triggers a 'buy' singnal, but the market is so efficient in adjusting to new information that it is impossible to devise successful trading strategies on the basis of new announcements. No one can buy or sell fast enough to benefit.
- Basic tenets of the theory: buying and holding a broad-based market index fund produces the most profitable and most successful returns.
- Cardinal rule of stock selection: look for companies with good growth prospects that have yet to be discovered by the stock market and therefor are selling at low earnings multiples. This approach is called GARP, growth ar a reasonable price. If growth does materalize, both the earnings multiple will likely increase, giving the investor a double benefit.

Examples of Fundamental Analysis Questions:
- Is the company's revenue growing?
- Is the company actually making a profit?
- Are they in a strong enough position to beat out their competitors?
- Are they able to repay their debts?

Castle in the Air Theory
- This theory analyzes how the crowd of investors will act in the future and the tendency in periods of optimism to build their hopes into castles in the air. Investors try to beat the gun by estimating what investment situations are most suceptible to public castle building and then buy them before the crowd.

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