This chapter is from the book
This chapter is from the book
This chapter is from the book
The Fundamental Approach
Fundamental analysis presumes security prices are based on the intrinsic value of the underlying company. Price is formed based on these values and facts surrounding the company. Seemingly, this is a highly logical approach, one that many assume is correct in most markets most of the time. The fundamentalist believes that with time, stocks will move up to minimize the disparity between their present value and their perceived intrinsic value. Thus, fundamental analysis presumes the future prospects of a security are best analyzed through a proper assessment of the intrinsic value of the underlying company.
Fundamental analysis is not concerned with the behavior of investors as measured through the stock price or trading volume. Rather, the pure fundamental analyst's focus is on finding the true worth of the underlying company. In pursuit of value, the fundamentalist collects, analyzes, and models company information, including earnings, assets, liabilities, sales, revenue, and other information required to evaluate the company. Assumptions of the fundamentalist include a belief that markets are not completely efficient and that all necessary information is available to the public, but the company may not always be efficiently priced. Overall, fundamentalists are concerned with what the price should be according to their valuation models. The determination of value from the collective action of these fundamentalist investors is the primary force moving today's markets.