Pete Souza/The White House
Photo courtesy International Monetary Fund
Warren Buffett
“If a business does well, the
stock eventually follows.”
The Value Investor
• The richest man in the world.
• Over 20% average return per year for over 40 years.
• Is known for his love for Cherry Coke and McDonalds burgers –
both companies in which he owns stock.
Fundamental Analysis is the technique used by investors to
determine how much a company is worth, and what growth there
may be in the future. This form of analysis focuses on the “economic
well-being” of the company, rather than just the movement of its
stock price.
George Soros
Known as “The Man who
The Technical Investor
broke the Bank of England”.
• Doubled his $1 billion
hedge fund in one week with the devaluation of the Pound.
• Invests using a method called “Reflexivity” – which attempts to
predict market psychology.
Technical Analysis is regarded as the opposite of fundamental
analysis. This kind of analysis can be used on shares, bonds, forex,
or any other instrument. Technical analysis can be defined as the
study of three things:
1. Price movements
2. Time
3. The volume of shares traded
Over time, these three things together have created patterns that
many traders use to try and predict how the price of an investment
instrument will change. What technical analysts are trying to do is
understand what other traders are thinking, and then outsmart them
in order to make a profit. They support the view that the market and,
therefore, the price of a share does not move up and down because
of how well or poorly the company performs, but rather by how
much traders like or dislike that share. So, instead of understanding
the company, technical analysis attempts to understand people and
what they will do in different situations.
The field of technical analysis is based on three assumptions:
1. Prices move in trends: Most strategies in trading assume that
prices move in trends, and continue on that trend until broken.
2. The market discounts everything: They believe that all fundamental
factors, along with human psychology, are already built into the
price of the instrument, and thus do not have to be analysed
separately.
3. History has a tendency to repeat itself: People tend to react to
certain market conditions in the same way over time. If you can
predict this typical human psychology, you can, in some way,
predict the outcome of an event.
In 2000, traders mocked value investing, buying overvalued Internet
stocks claiming that it was a new era in business – right up until the
great Internet bubble burst, with companies losing over 90% in just
days.
Evidently, investors from both schools of thought have regular
and sufficient investment success stories among their followers,
otherwise it would have been a slam-dunk as to which school of
thought one should subscribe. Which young investor would not be
happy to end up having the success of either a Buffet or a Soros?
There are many different names for the same thing in investing. Shares are the
same as securities, and instruments refer to all types of investments, such as
shares, bonds, commodities, and forex.
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