If you’ve ever browsed the financial section at a bookstore, you know there are almost as many theories on how to invest in stocks as there are stocks in which to invest. These stock investing methodologies break down into two camps, fundamental analysis and technical analysis, which are discussed here and in the next chapter.
Fundamental analysis is the art and science of examining the fundamental measures of a company to identify its underlying strengths and weaknesses. It is financial Darwinism at work, based on the notion that strong companies will survive—and the strongest will thrive. An investor who focuses on fundamentals digs into company financial statements, operating history, competitive pressures, and overall management expertise, as if he were Warren Buffett buying a business outright. (This makes perfect sense, because a shareholder does actually purchase a piece of a company when she buys shares of company stock.) As a fundamental investor, you collect data, research the business, study financial measures, and crunch numbers to amass enough knowledge about a company to develop your own outlook for the future of its stock.
Fundamental investors look for long-term, buy-and-hold stocks for their portfolios—companies that will outperform their peers and the overall market for at least several years—by analyzing three types of criteria: growth, quality, and value.