Page 93 - THE MARKET WHISPERER

THE MARKET WHISPERER 91

Fundamental Economic Analysis: What Does It
Incorporate?

A fundamental investor is one who buys a company’s stocks in the belief that
the main source of price change will be the company’s performance, which
covers changes in sales turnover, profitability, demand for the company’s
products, management, cash flows, and more. The main tools these
analysts use are the company’s balance sheet, analysts’ recommendations,
information gleaned from the media, and hearsay. A fundamental analyst
is also interested in the economic status and the status of the sector to
which the stock belongs, such as software developers, semiconductors,
and the like. Fundamental investors review market interest rates and try to
predict their direction and their scope of change. All this data is weighed,
and conclusions are reached.

These are usually long-term investors who do not expect to see their
predictions realized in the short term. They therefore keep their positions
in the hope of seeing them turn fruitful in the long term.

I use fundamental analysis at the level of media headlines. I don’t believe
in this type of analysis, but I do believe that the public, and funds, believe
in it, therefore I relate to it with due respect and give it some weight in
my decision-making processes. For example: let’s say the public believes
that the stocks of a certain biotechnology company will strengthen due
to a diverse set of components. This is good enough information for
me to realize I need to focus on technical trading opportunities with
biotechnology stocks. In actuality, I’m merging the technical analysis with
the fundamental economic analysis.

Random Walk

The theory of roaming negates all types of analysis, whether technical
or economic. This theory, developed in academia, sees price change as
completely random and unpredictable, and that nothing can be learned
from the stock’s history towards predicting its future trend. The theory
is based on another called “The Efficient Market Hypothesis,” according
to which prices embody all information available in the market. There
are no expensive or cheap stocks because the market calculates all risks
and opportunities as an embodied price. The “Random Walk Hypothesis”
claims that because markets are random, one should “walk” through them
“randomly” [from this point on], and that the best way to profit from a
stock is through a “buy and hold” action.

There is indeed a degree of randomness in the market, but to say that all