PostHeaderIcon Stock market investing schools of thought

Now that you know “How you can make money through stock market investing,” you must be really itching right now to start investing in the stock market and make millions !

Not so fast ! You’ve still got a long way to go. You have to choose your investing style. In order to do that, let me introduce you to the three stock market investing school of thoughts.

FUNDAMENTAL ANALYSIS

Fundamental analysis is a type of security analysis that analyzes a stock from a business perspective. “Fundamentalists” which is the term we will be using here for people adhering to this philosophy often read a lot about the company pouring over it’s financial statements assessing it’s management, competitive advantages, and analyzing competitors and market shares.

For the Fundamentalists, they take the expression that a “stock is a fractional ownership of a business” literally. For them there is no other better way to value a stock but to approach it from a business perspective.

There are different type of approaches and strategies to fundamental analysis. Among those are the “Buy and hold strategy,” “Contrarian investors” and of course the “value investors.”

For adherents of other school of thoughts of investing, using fundamentals to value a stock is a useless exercise as they believe that the current price of a certain stock reflects its true value as all other necessary factors that might affect its real value has already been factored in. Others criticize fundamental analysis as being tedious as it requires a lot of reading, comparison and analysis.

TECHNICAL ANALYSIS

Technical analysis is a type of analysis that studies the movement of stock prices and tries to forecast the price of a stock based on historical market data. Adherants of this school of thought in stock market investing are often called “technicians.”

Technicians try to find “patterns” and “trends” in stock market and often utilize charts to do this. Technicians do not try to value a stock. They merely exploit the movement of the prices and try to profit from them. They believe that the market discounts everything and hence there is no more need for analyzing a stock from a business perspective. One of their mantra is that “history will repeat itself.” Because of their belief that investor behavior repeats often, they believe that the charts will show a certain pattern which they can exploit.

There are more than 500 technical analysis trading systems and tools that have been developed all throughout the years. All of these are intended to find a “pattern” in the market. Some of them have fancy names such as Turtle trading, Elliot Wave etc. Others have disappeared into oblivion (Dogs of the Dow, Foolish four etc. )

Critics say that technical analysis is all pure guess work and that the practice of technical analysis is useless as it is akin to relying on astrology or charting the stars to predict the future. Man is too complex a being. Investor sentiment is hard to predict and nobody really knows where the market is next headed.

QUANTITATIVE ANALYSIS

Quantitative analysis is the use of complex mathematical formula to price stocks. Adherants of this school of thoughts in stock market investing are called “quants.” Quantitative analysis had its roots in the academe. Sometime in the 1950s, academicians started to apply mathematical principles to investment analysis.

Quantitative analysis is highly technical in nature and involves complex mathematical computation. Because of this computers are heavily used and utilized when making decisions as to which stocks to buy or sell, what stocks should be in one portfolio and the ideal strategy for diversification. Advance math such as stochastic calculus is often used in quantitative analysis. The goal of quantitative analysis is to try to replicate reality with the use of mathematics.

Critics of quantitative analysis argue that it is too complex to use for ordinary investors add to this are the blunders committed by academicians when they applied their “sophisticated” mathematical models to the actual world. Such application instead of producing great returns produced exactly the opposite.

So which among the three schools of thoughts should you adhere to? Should you use fundamental analysis, technical analysis or quantitative analysis? Find out more as we continue learn stock market investing and as you slowly go your to becoming an intelligent investor.

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2 Responses to “Stock market investing schools of thought”

  • Francis says:

    Using quatitative analysis is like John Nash (in a scene from “A Beautiful Mind” movie) creating a mathematical formula for the movement of birds.

    Love your blog btw! Just a newbie in stocks and I’m really learning a lot.

    Thanks!

  • zigfred says:

    Francis: Yes something like that. The problem is that if people use quantitative analysis then get burned in the stock market, instead of having a beautiful mind, they will have an ugly mind hehehehehe just kidding.

    Thanks for dropping by. Comments like this encourages me to make my blog become better and better with each and every post I write.

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D’ Intelligent investor is one of the first few updated value investing blogs in Asia and probably the only updated value investing blog in the Philippines where you can learn stock market investing through intelligent investing that makes business sense. The stock market investing strategies are very different from what most stock market players advocate. The strategies featured here are mainly value investing principles more specifically inclined with what are perceived to be Warren Buffett’s style of investing. Other value investing strategies by great value investors such as Benjamin Graham, Peter Lynch, John Boggle among others are also featured.