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I want to understand those various measures of stocks and companies, such as PE, PEG, ..., which I can find from Yahoo Finance etc, and how those measures can help in choosing stocks.

  1. I guess that is what fundamental analysis is trying to address, isn't it?
  2. If I am correct about that, could you recommend some books or online references on those topics?
  3. I heard that Warren Buffett is a successful investor using fundamental analysis. Has he written some good books for that purpose?

Thanks and regards!

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Definition: Fundamental analysis involves analyzing financial statements and health, management and competitive advantages, and competitors and markets.

Books are a great way to learn fundamental analysis but can be time consuming for something that really isn't very difficult. So the internet might be a better way to get started.

When using fundamental analysis all you are doing is trying to figure out how much a company is worth. The vocabulary and huge range of acronyms can be intimidating but really its a fairly simple task. You can use (investopedia) for definitions and simple examples when you do not fully understand something. IE: (PEG) You can search for definitions using the search bar on the top right (google also is a good source to look for additional definitions).

I recommend starting out by doing an independent analysis on a well known name such as Proctor & Gamble or Mcdonald's. Then you can compare your analysis to a professionals and see how they stack up.

Books and Resources:

Getting Started in Fundamental Analysis

Fundamental Analysis For Dummies

Fundamental analysis Wiki

What Is Fundamental Analysis? - Video tut from Investopedia

Fundamental Analysis: Introduction

Step by Step example of fundamental analysis - It's a pretty in depth forum post.

Side Notes:

Personally when I first began using fundamental analysis I found it difficult to understand why something is considered undervalued or overvalued. I couldn't figure out who was the "authority" on saying this. Well in short the "authority" basically is the market. You can say you believe XYZ is undervalued but you are only proven correct if the market agrees with you over long period of time.

Some key facts you should know:

  • fundamental analysis is used for long term investment not short term gains.

Many times a stock can be "broken" for many reasons. The price can go far beyond what would be considered a "normal valuation" (this is considered a bubble, e.g. the tech bubble of 1999-2000). It can also go far below a "normal valuation". In most cases these types of valuations are short lived and in the end a stock should return to "normal valuation" or at least this is the theory behind fundamental analysis.

  • When valuating a company many will use the valuation of the SP500 and/or the average valuation of the sector/industry.
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The Bible of fundamental analysis was written by Graham and Dodd, and is titled Security Analysis. If you don't know the name Benjamin Graham, Warren Buffet was his student and attributes his own success to Graham. If Security Analysis is a bit too intense for you, Graham also wrote The Intelligent Investor which is probably a better starting point.

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Below is just a little information on this topic from my small unique book "The small stock trader":

The most significant non-company-specific factor affecting stock price is the market sentiment, while the most significant company-specific factor is the earning power of the company. Perhaps it would be safe to say that technical analysis is more related to psychology/emotions, while fundamental analysis is more related to reason – that is why it is said that fundamental analysis tells you what to trade and technical analysis tells you when to trade. Thus, many stock traders use technical analysis as a timing tool for their entry and exit points. Technical analysis is more suitable for short-term trading and works best with large caps, for stock prices of large caps are more correlated with the general market, while small caps are more affected by company-specific news and speculation…:

Fundamental analysis

Perhaps small stock traders should not waste a lot of time on fundamental analysis; avoid overanalyzing the financial position, market position, and management of the focus companies. It is difficult to make wise trading decisions based only on fundamental analysis (company-specific news accounts for only about 25 percent of stock price fluctuations). There are only a few important figures and ratios to look at, such as:

  • EPS/Revenue
  • Cash/EBIT(TA)
  • Margins
  • Debt
  • Management
  • Products
  • Shareholders

perhaps also:

  • ROE
  • P/E
  • Dividend yield

Furthermore, single ratios and figures do not tell much, so it is wise to use a few ratios and figures in combination. You should look at their trends and also compare them with the company’s main competitors and the industry average. Preferably, you want to see trend improvements in these above-mentioned figures and ratios, or at least some stability when the times are tough.

Technical analysis

Despite all the exotic names found in technical analysis, simply put, it is the study of supply and demand for the stock, in order to predict and follow the trend. Many stock traders claim stock price just represents the current supply and demand for that stock and moves to the greater side of the forces of supply and demand.

If you focus on a few simple small caps, perhaps you should just use the basic principles of technical analysis, such as:

  • Price and volume
  • Support and resistance
  • Trends and moving averages

I have no doubt that there are different ways to make money in the stock market. Some may succeed purely on the basis of technical analysis, some purely due to fundamental analysis, and others from a combination of these two like most of the great stock traders have done (Jesse Livermore, Bernard Baruch, Gerald Loeb, Nicolas Darvas, William O’Neil, and Steven Cohen). It is just a matter of finding out what best fits your personality. I hope the above little information from my small unique book was a little helpful!

Mika (author of "The small stock trader")

  • Mika - Welcome. I added some formatting to your post. The site uses a special markup style to control formatting. Thanks for your answer. – MrChrister Aug 20 '12 at 15:55

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