People get involved in the stock market with the best of intentions: they do it to make their money start working harder for them. When I first started dabbling in equities right out of school, I really didn’t know much. I remember how at my first job, I received some brochures about my first 401K and an ESPP plan, but I had no idea what I was doing. Many years later and with many books studied, I finally learned about two different ways of making that money.

Here is a review of what those ways are. From the Wikipedia:

Technical Analysis

This manner of playing the market assumes that non-random price patterns and trends exist in markets, and that these patterns can be identified and exploited. While many different methods and tools are used, the study of charts of past price and trading action is primary. It maintains that all information is reflected already in the stock price, so fundamental analysis is a waste of time. Trends “are your friend” and sentiment changes predate and predict trend changes. Investors’ emotional responses to price movements lead to recognizable price chart patterns. Technical analysis does not care what the “value” of a stock is. Their price predictions are only extrapolations from historical price patterns.

Fundamental Analysis

This type of analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. The analysis is performed on historical and present data, but with the goal to make financial projections. There are several possible objectives:
* to calculate a company’s credit risk,
* to make projection on its business performance,
* to evaluate its management and make internal business decisions,
* to make the company’s stock valuation and predict its probable price evolution.
Prediction of how the stock will move, normally for the longer term, is based on the company’s fundamentals and valuation.

For fun, I thought to share my impressions of these different financial schools of thought. You can certainly make money using techniques rooted in any one or even both of these paradigms, but take note that patience, experience and in some cases, skill, play a large part in your success when participating in the markets.

So I’ve made some comparisons of these strategies that people employ when playing the stock market. On the left hand column are images that to me, appear to closely reflect technical analysis; while the right hand column invokes images that reference fundamental analysis. Of course, these are just my casual notions about these two divergent investing methodologies. These differences aren’t meant to be mutually exclusive nor comprehensive. But feel free to pick them apart.

Technical Analysis

          

Fundamental Analysis
stock market volatility

Stock Market Volatility is your friend

    Versus     power of compounding

The Power of Compounding is your friend

 

day trader

Day Trading

    Versus    
peter lynch john bogle

Longer term investing with mutual fund managers like Peter Lynch or John Bogle

 

pennies

Make money out of movement from the market, with each movement often measured in pennies

    Versus     retail store

Make money out of your stake in companies and how their products or services sell

 

motorbike

How investors see traders

    Versus     grandmother

How traders see investors

 

hare

This may yield a get rich quickly scheme, when you work on your own terms, using rapid reflexes and lightning fingers, but when you can go broke just as quickly if you don’t know what you’re doing. Market timing rules your methods.
    Versus     tortoise

This is the path taken to grow rich more slowly, relatively speaking, but depending on how your portfolio is set up, it can actually be quicker than you think. It often involves buy and hold and longer term investing strategies.

 

-ooOoo-

I hope you enjoyed our little lesson on the various ways to analyze the market. What’s important is that you know yourself well enough to figure out what you’re comfortable with. I don’t believe that there are any wrong investment approaches in the absolute sense, just dangerous ones. A strategy becomes dangerous if you decide to apply it without sufficient planning, knowledge or study, causing you to make reckless moves or generate heavy losses. So the key is to go with what works for you, realizing your limitations while capitalizing on your strengths.

As for us, we’ve always been fundamental investors and after hearing the stories of our day trader friends, we’re convinced we’re doing the right thing for ourselves.