Wednesday, August 30, 2006

Coaching Call Week 10

Today Rob and I went through Chapter 3 "Fundamental Analysis" of the coaching manual. This approach to fundamental analysis is based on scoring various aspects of the company's fundamental information, giving 1-20 points per item, with 100 being the highest possible score. Anything above 80 is a pretty good indication of a fundamentally strong company.

The potential value for each bit of fundamental information is added up based on certain thresholds and industry comparisons. For example if the Sales % is > 25%, 5 points are awarded; 5 points are also awarded if the EPS (Earnings Per Share) % is > 25%; if the EPS % is > the Sales % 10 points are awarded. Different aspects of the fundamentals get weighted with higher or lower possible points. Simply adding them up gives you a reasonably complete evaluation of the fundamental picture.

It's a fairly easy-to-follow system. Unfortunately, some of the directions in the printed coaching manual no longer match the software exactly. Some of the fundamental analysis information needed to be collected from Yahoo instead of in the area described in the print. This is the first worthwhile flaw I've found in the materials, but it doesn't invalidate the system, it just makes the evaluation process require a trifle more time & energy to perform.

More than just blindly filling in the worksheet with the above scores, this chapter explained how some fundamental aspects relate to others and what that can say about the company. Looking at earnings vs revenue could reveal that the company is having to cut back in order to continue the facade of a rosy general financial picture. I think one of the more powerful aspects of fundamental analysis for a trader is the ability to compare these aspects of a company's fundamentals in order to sense a strengthening fundamental picture versus a weakening fundamental picture.

As a trader, I don't know that I'll really ever spend a lot of time evaluating the fundamentals, but I do recognize that it is a worthwhile study in particular for longer term position trades. The big trouble with any kind of fundamental analysis is timing. And timing is everything. You may have the right analysis of the fundamentals of a company, but you must use technical analysis to ascertain when to enter and when to exit.

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