Fundamental Analysis

If you are as most of the individual investors, you will surely think that there is a mysterious aura covering the world of the security analysis, for many investors, the security analysts, as are their tools and techniques, are a far away reality, complex and hard to understand. In this section we will try to convince you that the security analysts is simply this application of common sense, and certain key mathematical relations, to the decisions of purchase, observing or selling a determined securities.

Definition of what is a “good investment”
The deceased Benjamin Graham, considered by Warren Buffett, Peter Lynch and other disciples of him, as the most prominent defender of the fundamental analysis used to affirm in its basic work, the intelligent investor that “the habit to relate the amount paid with that that is offered is of immeasurable value for the investors activity.” This is expressed in a simpler way by this question: What does an investment really worth? The fundamental analysis system proposed by Graham has for final conclusion to determine what an investor would be willing to pay, in a private sale for all the assets (buildings, stocks, machinery, clients portfolios, etc) of a company. Graham’s methodology requires a solid intellectual structure to make decisions, and to not be contaminated by sentimentalisms. But the first is to determine what is understood by a “good investment”. In Grahams opinion, you cannot consider that a security is a good investment only because it can be bought at a price near to its net active value. You also need a reasonable relation of price / benefit. A solid economic situation and a certain degree of confidence in that there will continue to be benefits in the future. For a security to be a “real” bargain it must have an indicative value of at least 50% superior to the market price estimated by the following two methods:

1. The valuation method that leans in a great measure in an estimation of the future benefits to which a multiplying factor is applied in consonance with the company and the sector of activity.
2. The value of a company to the eyes of an individual investor is determined by the realizable value of the assets and especially by the net current assets or current capital.

Graham thought that the perceptions of the market or its ineffectiveness gave place to sub-valuations, generally caused by disappointing results, by a prolonged oblivion or unpopularity or in the incapacity of the market to recognize the true situation of the company as for their assets and benefits. Basing themselves in the enormous over-valuations that took place at the end of the twenties with the securities of the radio and other technologies that where beginning to manifest.

Graham also concluded that:

1. that the clear physical growth perspectives did not have to be translated as clear benefits for the investors, and
2. that the experts did not have a trustworthy method to select the most promising companies of the most promising sectors.

It’s a conclusion that has been kept along the time and that lately has been corroborated with the “investment bubbles” of the bio-technical sectors of computers and Internet.