Updated October 26, 2023
What is Fundamentals
The basic concept underlying fundamentals is that bulls/bears make money, and pigs get slaughtered. This pithy adage captures the essence of fundamentals- Greed may be good in some ways, but it is not a friend in the stock market.
Apart from this basic, there are other signs you should heed while investing in the markets and wondering if any of this involves reading tea leaves or gazing into a crystal ball. Certainly not! The market follows logical yet creative rules, and predictions don’t work; persistence does. Good things come to those who work hard, and better things come to those who are patient, but the best is only possible if you never give up, which holds in the stock market.
Why Are Fundamentals?
1. Taxes are not Your Enemies but your Friends
Even if gains are short-term, taxes are permanent. What makes them an important aspect of trading is that they are far less taxing than the losses that can accrue from the fundamental market if you are not careful. Worrying about the tax man instead of market strategies will surely annihilate you.
2. Fools rush in Where Angels Fear to Tread
A wise adage says rushing into charge can get you in front of the firing line, which is so for trading in fundamentals. If you try eating a whole week’s worth of dinners in one go, a big problem will result. So, no matter what your appetite for risk is, buying or selling all at once can be disastrous. Stage your purchases or sales gradually, and don’t rush in, or you will waste your time. If you watch out for the flip side, the benefits will eventually gain on you and ensure you are ahead in the game. So catch the risks and downside early in the trading process, or this game changer will become a race against time (and the markets).
3. If you put your Eggs in one Basket, Don’t Count on not Getting Scrambled!
Oil in the 1980s, tech stocks in the 2000s, and the pharma sector in 2015…what is common across all these markets? The fact remains that putting all your energies into a single stock instead of diversifying is likely to have multiple drawbacks for you. For one, the notion of sector risk is maximized. Narrowing your options will limit the scope for growth. Sector risk constitutes 50% of the risk of holding on to a stock. You can weather the perfect market storm if you mix enough different sectors in your investment portfolio. You are diversifying means buying or selling stocks that are not similar to each other. Controlling risk through diversification has its rewards in the long term.
4. Want Good Grades? Then Read Up!
If you don’t do your homework, don’t expect to get good grades in the stock market. Opt for companies that are top performers if you want a good return. Research all aspects of the company; otherwise, you can get caught in the classic trap of investing without knowing, betting instead of trading. Investing in an expensive stock will cost you less trouble in the long run if it is worth every penny you spend on it.
5. Trade Only When you can Defend your Turf
When times get hard, you will not last in the market if you race to protect all stocks instead of a chosen few. When trading gets tough, pick only your preferred and prioritized stocks instead of a more generalized fire-fighting approach.
6. Don’t Invest if the Company is Sinking, for it will Never Learn to Swim
Abandoning a sinking ship is a primary rule in the markets. Bad firms will never get bids, so focus only on good fundamentals. Choose some positions you like and stick to them. In the markets, persistence pays in every sense of the term.
7. Strike When the Iron is Hot
A good mindset is needed to attain excellent results in the market. There are better times to invest in fundamentals if you are not in a positive mainframe. Expect corrections; don’t fear them. Be ready for the blow when it strikes so you can evade it.
8. Watch More than the Stocks
Observe the condition of the bonds. Why so? Simply because stocks are to bonds what Donald Trump is to Hillary Clinton. Direct competition prevails in the markets between stocks and bonds. Never trade based on emotion. Choose logic instead. Only deal when you are in a flexible position; otherwise, the sun will set on your trading sessions, and you will be left in the shadows! Take a cue from others and invest when the signs are positive. If residents of the stock market are giving up, so should you. Unexpected shifts in the market are recognized by symptoms such as the quitting of high-level executives, an IPO that didn’t get a good response or a product that fails to sell.
9. Don’t Buy Into the Hype
Wall Street can make tall tales, and the same holds for stock exchanges worldwide. The Nikkei will not reward you if you have a yen for believing rumors. Remember to underestimate the power of the promotion machine and double-meaning analysts who see profit where there is the possibility of none.
10. Buy or Sell Only when you are Sure
Buying stocks may be a solitary event, but the movement of the markets is greatly influenced by diverse factors across the globe. You need to be clear about your investing reasons before taking the plunge. To make a reliable profit, you must understand what a stock is worth and how much others will pay. Stock prices fluctuate for many reasons, ranging from a report from a stock analyst to wider macroeconomic news happenings. There are as many different strategies as there are players in the game. Only some people invest in value or evaluate the information as a free cash flow.
So, rationality and market investment may go in different ways. The strong grip of trends and patterns in deciding the final movement is a foregone conclusion. What is equally important is looking at the actual numbers in hand and the margin of safety if you don’t want to fall into the clutches of wrong market strategies.
11. Invest only When there is Clarity Regarding the Fluctuation of Business Values
Stock prices move on account of valuation. It is an important part of investing principles. Concrete valuations are often hard to assess. The clue lies in checking the business decisions, which are the basis of tangible evidence that stock prices will change.
12. Be Clear when Price Changes Create Opportunities for Investing
Markets may not be rational when stocks are priced every day. But rather than getting caught in a herd mentality, value investors have opportunities to purchase great companies at really reasonable prices. Price changes create a point where investing in certain fundamentals will yield rich dividends. Use the discounted present value calculation to check if the price has dipped to a point where it is a real bargain.
13. The greater the Price Drops, the Better the Bargain
Price drops represent factual evidence that can be used to assist market investment decisions. If the price falls further, you get a better bargain. Always keep the safety margin in mind. Remember, if you do not invest money, you will not lose any, but you will never make money. Market folklore indicates many patterns and trends. Trade volumes may decrease in certain periods, but knowing when to buy and sell ensures you don’t lose out on the gains.
14. Recognizing Limitations is Important
Market guru Warren Buffet has expounded the following words of wisdom- one does not need to be an expert to attain satisfactory investment returns. Recognition of limitations and keeping it simple should be the focus.
15. Assess the Future Productivity of the Asset in Objective Terms
Stocks can only be an asset because they indicate future profitability. In the absence of the possibility of gains in the future, it’s a no-brainer that you need to get out rather than holding on and hoping things will improve.
16. The Bigger Picture is not Always Better
Forming macro opinions and listening to market predictions not based on actual numbers will likely cost you. To quote finance expert Ben Graham, investments are most intelligent when businesslike.
17. Little Knowledge is a Dangerous Thing
Do not invest in fundamentals you don’t fully understand. Consider the risks involved and always invest after considering all the implications. If something is too complicated to understand, it is probably riskier to invest in, too. So, don’t be lured by structured products that promise rewards at the cost of too many risks.
18. Market Timing is a Waste of Time!
Market timing refers to investing towards the lower ends of the market cycles and getting out at the top. But what is simple in theory is complex in practice. Money flows into funds and markets only when they go up and vice versa. Demand rises as price increases, making fundamentals Giffen goods for investors. If you think timing the market will work, consider the paradoxes before buying into this simple reasoning.
19. Check the Cash Drag, and Watch out for the Fees
S0, while hiring a high-profile investor will increase your chances of profit, it will also lower the cash in hand. Income from investments should be secured against commissions and fees, which will swallow it completely. Fees are paid to advisers and fund managers, which can drag the investment performance.
20. Too Much of a Good Thing can be Bad
Over-diversification can also negatively affect the investor in the long term. Portfolio diversification will improve investment performance, but going beyond a certain point can prove counterproductive. If you diversify beyond a certain point, you will know less about investment.
21. Do not Invest to Avoid Tax
From VC trusts to enterprise investment schemes, these financial vehicles aim to ensure taxes are not the road bumps in your path to prosperity. But if you consider it cheaper to pay the tax than avoid or defer it, you will find concrete success for your financial roadmap to perfect investments.
22. Don’t Settle for the Better When you can go for the Best
Good companies refer to those that make high returns in cash terms on capital used and reinvest part of the cash flow to grow business and compound investment values. If you think investing in less-than-excellent companies will yield long-term results because such companies are “ going to improve” when management changes or there is a merger, you are in for a surprise. Why invest in better companies when you can go for the best? Never compromise on quality while investing in fundamentals.
23. Remember the Golden Mean
What goes up must come down, and markets adhere to a certain balance. So, while there may be a bull or bear market for some time, saner long-term valuation levels will eventually be reached. Don’t think the bull market will last forever, or you will lose money. Don’t anticipate a permanent bear market either because this does change.
24. Expect Overcorrection when the Market Overshoots
Always remember that any excesses in one direction will eventually lead to excesses in the opposite direction. Fear gives way to greed, but the latter can also be a precursor of the former. If tuned into the markets, you can face the music when the market overshoots and consequently overcorrects in the long term. Constant vigilance has its rewards.
25. Don’t be Swayed by the Herd Mentality
An independent market thinker is imperative if you want long-lasting financial success. You will only succeed at the markets if you follow the crowd. Getting swayed by the opinions of others, especially newspaper reports and market programs will lead you wrong because when markets make it to the news, a reversion is on the cards.
26. Invest when you are Rational
Human emotions can stand in the way of successful trading. A disciplined approach to investing is the way forward, and the science of mastering trading mind traps or neuroeconomics is the latest step forward for market success. Emotions can blur the lines between illusion and reality. Rely on actual numbers and facts rather than emotions if you want to make money in the long term.
Trading mind traps and herd mentality are the biggest pitfalls for those investing in fundamentals. They can be real roadblocks to financial success. Planning for a productive future involves knowing your numbers and their economic implications. It also involves much independent thinking and initiative to beat the markets. Whether you follow or go against the trends will be the deciding factor in lasting market success. So, stick to the mantras provided by financial gurus yet dare to think differently, for the markets are as dynamic as they are rational.
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