PORTFOLIO MANAGEMENT II
Investment Analysis
By Alexandra Twin
What Is Investment Analysis?
Investment analysis is a broad term for many different methods of evaluating investments, industry
sectors, and economic trends. It can include charting past returns to predict future performance, selecting
the type of investment that best suits an investor's needs, or evaluating individual securities such as stocks
and bonds to determine their risks, yield potential, or price movements.
Investment analysis is key to a sound portfolio management strategy.
Understanding Investment Analysis
The aim of investment analysis is to determine how an investment is likely to perform and how suitable it
is for a particular investor. Key factors in investment analysis include;
the appropriate entry price,
the expected time horizon for holding an investment,
and the role the investment will play in the portfolio as a whole.
In conducting an investment analysis of a mutual fund, for example, an investor looks at how the fund
performed over time compared to its benchmark and to its main competitors. Peer fund comparison
includes investigating the differences in performance, expense ratios, management stability, sector
weighting, investment style, and asset allocation.
In investing, one size does not fit all. Just as there are many different types of investors with unique goals,
time horizons, and incomes, there are investment opportunities that match those individual parameters.
Strategic Thinking
Investment analysis can also involve evaluating an overall investment strategy in terms of the thought
process that went into making it, the person's needs and financial situation at the time, how the portfolio
performed, and whether it's time for a correction or adjustment.
Investors who are not comfortable doing investment analysis on their own can seek advice from an
investment advisor or another financial professional.
Key points
Investment analysis involves researching and evaluating a security or an industry to predict its
future performance and determine its suitability to a specific investor.
Investment analysis may also involve evaluating or creating an overall financial strategy.
Types of investment analysis include bottom-up, top-down, fundamental, and technical.
Types of Investment Analysis
,While there are countless ways to analyze securities, sectors, and markets, investment analysis can be
divided into several basic approaches.
i) Top-Down vs. Bottom-Up
When making investment decisions, investors can use a bottom-up investment analysis approach or a top-
down approach.
Bottom-up investment analysis entails analyzing individual stocks for their merits, such as their
valuation, management competence, pricing power, and other unique characteristics.
Bottom-up investment analysis does not focus on economic cycles or market cycles. Instead, it aims to
find the best companies and stocks regardless of the overarching trends. In essence, bottom-up investing
takes a microeconomic approach to investing rather than a macroeconomic or global approach.
The global approach is a hallmark of top-down investment analysis. It starts with an analysis of the
economic, market, and industry trends before zeroing in on the investments that will benefit from those
trends.
Top-Down and Bottom-Up Examples
In a top-down approach, an investor might evaluate various sectors and conclude that financials will
likely perform better than industrials. As a result, the investor decides the investment portfolio will be
overweight financials and underweight industrials. Then it's time to find the best stocks in the financial
sector.
Proponents of bottom-up analysis include Warren Buffett and his mentor, Benjamin Graham.
In contrast, the bottom-up investor may have found that an industrial company made for a compelling
investment and allocated a significant amount of capital to it even though the outlook for the broader
industry was relatively negative. The investor has concluded that the stock will outperform its industry.
Fundamental vs. Technical Analysis
Other investment analysis methods include fundamental analysis and technical analysis.
FUNDAMENTAL ANALYSIS
By Troy Segal
What Is Fundamental Analysis?
Fundamental analysis (FA) is a method of measuring a security's intrinsic value by examining related
economic and financial factors. Fundamental analysts study anything that can affect the security's value,
from macroeconomic factors such as the state of the economy and industry conditions to microeconomic
factors like the effectiveness of the company's management.
, The end goal is to arrive at a number that an investor can compare with a security's current price in order
to see whether the security is undervalued or overvalued.
The fundamental analyst stresses the financial health of companies as well as the broader economic
outlook. Practitioners of fundamental analysis seek stocks they believe the market has mispriced. That is,
they are trading at a price lower than is warranted by their intrinsic value (REF valuation of debentures
and shares by their returns and value at redemption or disposal in valuation of debentures and
shares).
Often using bottom-up analysis, these investors will evaluate a company's financial soundness, future
business prospects, and dividend potential to determine whether it will make a satisfactory investment.
Proponents of this style include Warren Buffett and his mentor, Benjamin Graham.
This method of stock analysis is considered to be in contrast to technical analysis, which forecasts the
direction of prices through an analysis of historical market data such as price and volume.
Key points
Fundamental analysis is a method of determining a stock's real or "fair market" value.
Fundamental analysts search for stocks that are currently trading at prices that are higher or lower
than their real value.
If the fair market value is higher than the market price, the stock is deemed to be undervalued and
a buy recommendation is given.
In contrast, technical analysts ignore the fundamentals in favor of studying the historical price trends of
the stock
Technical Analysis
The technical analysis evaluates patterns of stock prices and statistical parameters, using computer-
calculated charts and graphs. It focuses on patterns of price movements, trading signals, and various other
analytical charting tools to evaluate a security's strength or weakness.
Day traders make frequent use of technical analysis in devising their strategies and timing their buying
and selling activity.
Real-World Example of Investment Analysis
Research analysts frequently release investment analysis reports on individual securities, asset classes,
and market sectors, with a recommendation to buy, sell or hold them.
Random Walk Theory
The Random Walk Theory, or the Random Walk Hypothesis, is a mathematical model of the stock
market. Proponents of the theory believe that the prices of securities in the stock market evolve according
to a random walk.
A “random walk” is a statistical phenomenon where a variable follows no discernible trend and moves
seemingly at random. The random walk theory, as applied to trading, most clearly laid out by Burton
Investment Analysis
By Alexandra Twin
What Is Investment Analysis?
Investment analysis is a broad term for many different methods of evaluating investments, industry
sectors, and economic trends. It can include charting past returns to predict future performance, selecting
the type of investment that best suits an investor's needs, or evaluating individual securities such as stocks
and bonds to determine their risks, yield potential, or price movements.
Investment analysis is key to a sound portfolio management strategy.
Understanding Investment Analysis
The aim of investment analysis is to determine how an investment is likely to perform and how suitable it
is for a particular investor. Key factors in investment analysis include;
the appropriate entry price,
the expected time horizon for holding an investment,
and the role the investment will play in the portfolio as a whole.
In conducting an investment analysis of a mutual fund, for example, an investor looks at how the fund
performed over time compared to its benchmark and to its main competitors. Peer fund comparison
includes investigating the differences in performance, expense ratios, management stability, sector
weighting, investment style, and asset allocation.
In investing, one size does not fit all. Just as there are many different types of investors with unique goals,
time horizons, and incomes, there are investment opportunities that match those individual parameters.
Strategic Thinking
Investment analysis can also involve evaluating an overall investment strategy in terms of the thought
process that went into making it, the person's needs and financial situation at the time, how the portfolio
performed, and whether it's time for a correction or adjustment.
Investors who are not comfortable doing investment analysis on their own can seek advice from an
investment advisor or another financial professional.
Key points
Investment analysis involves researching and evaluating a security or an industry to predict its
future performance and determine its suitability to a specific investor.
Investment analysis may also involve evaluating or creating an overall financial strategy.
Types of investment analysis include bottom-up, top-down, fundamental, and technical.
Types of Investment Analysis
,While there are countless ways to analyze securities, sectors, and markets, investment analysis can be
divided into several basic approaches.
i) Top-Down vs. Bottom-Up
When making investment decisions, investors can use a bottom-up investment analysis approach or a top-
down approach.
Bottom-up investment analysis entails analyzing individual stocks for their merits, such as their
valuation, management competence, pricing power, and other unique characteristics.
Bottom-up investment analysis does not focus on economic cycles or market cycles. Instead, it aims to
find the best companies and stocks regardless of the overarching trends. In essence, bottom-up investing
takes a microeconomic approach to investing rather than a macroeconomic or global approach.
The global approach is a hallmark of top-down investment analysis. It starts with an analysis of the
economic, market, and industry trends before zeroing in on the investments that will benefit from those
trends.
Top-Down and Bottom-Up Examples
In a top-down approach, an investor might evaluate various sectors and conclude that financials will
likely perform better than industrials. As a result, the investor decides the investment portfolio will be
overweight financials and underweight industrials. Then it's time to find the best stocks in the financial
sector.
Proponents of bottom-up analysis include Warren Buffett and his mentor, Benjamin Graham.
In contrast, the bottom-up investor may have found that an industrial company made for a compelling
investment and allocated a significant amount of capital to it even though the outlook for the broader
industry was relatively negative. The investor has concluded that the stock will outperform its industry.
Fundamental vs. Technical Analysis
Other investment analysis methods include fundamental analysis and technical analysis.
FUNDAMENTAL ANALYSIS
By Troy Segal
What Is Fundamental Analysis?
Fundamental analysis (FA) is a method of measuring a security's intrinsic value by examining related
economic and financial factors. Fundamental analysts study anything that can affect the security's value,
from macroeconomic factors such as the state of the economy and industry conditions to microeconomic
factors like the effectiveness of the company's management.
, The end goal is to arrive at a number that an investor can compare with a security's current price in order
to see whether the security is undervalued or overvalued.
The fundamental analyst stresses the financial health of companies as well as the broader economic
outlook. Practitioners of fundamental analysis seek stocks they believe the market has mispriced. That is,
they are trading at a price lower than is warranted by their intrinsic value (REF valuation of debentures
and shares by their returns and value at redemption or disposal in valuation of debentures and
shares).
Often using bottom-up analysis, these investors will evaluate a company's financial soundness, future
business prospects, and dividend potential to determine whether it will make a satisfactory investment.
Proponents of this style include Warren Buffett and his mentor, Benjamin Graham.
This method of stock analysis is considered to be in contrast to technical analysis, which forecasts the
direction of prices through an analysis of historical market data such as price and volume.
Key points
Fundamental analysis is a method of determining a stock's real or "fair market" value.
Fundamental analysts search for stocks that are currently trading at prices that are higher or lower
than their real value.
If the fair market value is higher than the market price, the stock is deemed to be undervalued and
a buy recommendation is given.
In contrast, technical analysts ignore the fundamentals in favor of studying the historical price trends of
the stock
Technical Analysis
The technical analysis evaluates patterns of stock prices and statistical parameters, using computer-
calculated charts and graphs. It focuses on patterns of price movements, trading signals, and various other
analytical charting tools to evaluate a security's strength or weakness.
Day traders make frequent use of technical analysis in devising their strategies and timing their buying
and selling activity.
Real-World Example of Investment Analysis
Research analysts frequently release investment analysis reports on individual securities, asset classes,
and market sectors, with a recommendation to buy, sell or hold them.
Random Walk Theory
The Random Walk Theory, or the Random Walk Hypothesis, is a mathematical model of the stock
market. Proponents of the theory believe that the prices of securities in the stock market evolve according
to a random walk.
A “random walk” is a statistical phenomenon where a variable follows no discernible trend and moves
seemingly at random. The random walk theory, as applied to trading, most clearly laid out by Burton
