Use By Different Portfolio Styles
Investors may use fundamental analysis within different portfolio management styles.
- Buy and hold investors believe that latching onto good businesses allows the investor's asset to grow with the business. Fundamental analysis lets them find 'good' companies, so they lower their risk and probability of wipe-out.
- Managers may use fundamental analysis to correctly value 'good' and 'bad' companies. Eventually 'bad' companies' stock goes up and down, creating opportunities for profits.
- Managers may also consider the economic cycle in determining whether conditions are 'right' to buy fundamentally suitable companies.
- Contrarian investors distinguish "in the short run, the market is a voting machine, not a weighing machine". Fundamental analysis allows you to make your own decision on value, and ignore the market.
- Value investors restrict their attention to under-valued companies, believing that 'it's hard to fall out of a ditch'. The value comes from fundamental analysis.
- Managers may use fundamental analysis to determine future growth rates for buying high priced growth stocks.
- Managers may also include fundamental factors along with technical factors into computer models (quantitative analysis).
Read more about this topic: Fundamental Analysis
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