There is not only one strategy when it comes to making money in the stock market. Everyone may say that their way is the best. Shaye Hirsch, the founder of Brio Capital Management, believes that you need to stick to the approach that best fits your talent and experience. As there are many ways to fail, there are also many ways to succeed, which makes it a complicated market.
Hirsch categorizes investing/trading styles into four categories:
- Fundamental: The decision is made upon quantitative analysis of the company’s financial information and qualitative analysis of its business, competition, and economic environment.
- Technical: In order to make the final decision, stock charts and chart patterns are used.
- Statistical: Trading models derived from a database of multiple variables are developed in order to discern the final decision.
- Arbitrage: A simultaneous purchase and sale of a security, securities, or derivatives is made in order to receive a low-risk profit.
Shaye Hirsch’s personal style is to primarily utilize a fundamental style of investing. In addition, Shaye has developed a series of statistical index trading models, which he also trades on. However, this accounts for only a fraction of the assets Shaye manages.
Sometimes, Hirsch will also employ arbitrage techniques and incorporate technical analysis when making a trading decision or risk-managing a position. For this part, Shaye will focus on the fundamental approach to investing.
Are You Using Fundamental Analysis for Growth or Value?
As Hirsch has written in his publications, there are two primary schools of thought on fundamental investing: growth and value.
Fundamental Investing: Growth
A “growth investor” is considered someone who is concerned with the rate at which a company will increase its earnings stream over a period of time. These kinds of investors seek out companies with accelerating or high levels of sustained growth. Companies with declining growth rates are avoided by these investors
However, stocks can exhibit growth deceleration. A company that has been a hot stock and couldn’t stop rising suddenly starts to mature and its growth rate starts to decline.
A stock is not always going to sustain that growth rate as long as you’d prefer. As a result, growth is a two-sided equation where the seductive aspects are balanced by their risks.
Fundamental Investing: Value
Value investors seek to purchase companies that are undervalued. That means they are selling (trading) at less than their real value. The real value of a company can be easily calculated. It’s done by analyzing the discounted cash flows of future earnings, valuation of assets fewer liabilities, or via certain ratios such as the price-to-earnings ratio (P/E or multiple) and the price-to-book ratio (stock price divided by the book value per share). In Shaye Hirsch’s opinion, the most famous value investor of all time is Warren Buffett.
Some value investors think that value and growth are not linked at all. However, other value investors, such as Warren Buffet, and even Shaye Hirsch itself, believe that value and growth are inextricably linked. Some investors follow the GARP theory (Growth at a Reasonable Price), which combines elements of both, value and growth investing.
How Fundamental Traders Analyze Stocks
The fundamental stock analysis consists of collectings of all the necessary information that will provide you with the necessary information. This data is required to completely understand the company you are interested in.
A shortage of public data is not available, so in order to get a better idea of where a stock could be headed, you will need to make a fundamental analysis.
Topics to analyze
Hirsch is an investor whose company has won the 2017 Hedge Fund Awards. He gives a list of the information you’ll need to gather in order to get started with the fundamental analysis:
- Financial Statements: It is important to learn how to read financial statements. At least, try to make sure you read the most recent annual report and the two most recent quarterly reports.
- Conference Calls: Another important aspect is to listen and analyze earning calls. There are archives of these calls online for many companies. There are also some services from which you can purchase conference call transcripts. Make sure to listen to the two most recent earning calls.
- Press Releases and News: Make research news and financial websites and read all the press releases, news items, and commentary that have been published since the last earnings report of the company.
- Analysts’ Reports: Make sure to review as many recent analysts’ reports as you can. An important thing to remember is to always read a report from an analyst with a solid reputation for coverage of that company or industry. Always look for the “axe” in the name. This is a symbol for the to-go analyst with the best historical call on that stock.
- Historical Data: Historical data can be extremely helpful. Some websites and apps provide historical metrics for individual stocks, with data and, in some cases, grades and recommendations for what to do with the stock.
- Analysts Estimates: The data from the Wall Street analysts about the estimated EPS and revenues is accumulated by information providers and an average (or consensus) estimate is calculated. Then, this consensus becomes the basis for the “earnings expectation,” which is often talked about in financial media.
Analyze the company’s stocks
If you obtain and analyze all the above-listed company data, you will be able to get a better view of the company’s stocks. It will then help you determine if it is a fundamental buy, hold, or sale (or perhaps even a short sale).
Before you can do this, the experienced financial analyst and investor, Shaye Hirsch recommends you first get comfortable with all these different sources of information.
Here Shaye has some recommendations for you, in order to help you learn ways of the fundamental investor and analyst:
- Obtain all of the data for your favorite public company, Hirsch listed above, and carefully read (or listen) through it all.
- Investigate analysts’ opinions about the company.
- Obtain a copy of Graham and Dodd’s Security Analysis.