Fundamental vs Technical Analysis

Fundamental Analysis tries to determine the intrinsic value of a stock. It relies on historical financial performance of a company and its projected future performance.

The three most useful reports in financial statements are the balance sheet, the cash flow statement and the income statement.

And you thought you would never hear of this stuff again!

Tools that are used in fundamental analysis include:

Earnings

Earnings Per Share

P/E Ratio

PEG

Dividend Yield

Dividend Payout Ratio

Book Value

Price / Book

Price / Sales Ratio

Return on Equity (ROE)

We will cover each tool in the next few weeks and practically evaluate stock in the market.

Technical Analysis tends to use charts and calculation to identify prevailing price trends in order to cash in on the price action.

Technical analysis doesn’t bother to look at the fundamental data. It assumes that all the data available is already reflected in the price.

So there will be no P/E, PEG yadi yada yada. Nice eh?

Well it’s not so simple.

Tools in technical analysis include:

Moving Averages

Relative Strength

Momentum

Bollinger Bands

Volume

Support & Resistance levels


We shall also cover these tools and how you can use them in the next few weeks.
Note that these are not the only tools available in both technical and fundamental analysis.

Sentiment Analysis is used to analyse the next hot tip. The next hot stock.It seeks to determine the emotions of investors in the market.

Tools used in sentiment analysis include:

Ear

Mouth

Eyes

Sentiment analysis comes in the form of rumors and misunderstanding in the markets.
This is where speculators reside.

We shall also cover aspects of sentiment analysis.

In covering these three areas Uncle James and I hope that you will be better equipped to make your stock picks a refined process rather the a “shoot first ask later” decision.

As a close friend of mine would say, have a fantabulous week!

The Animal Farm

The Bulls
A bull market is when prices are moving up in the market. There is a lot of optimism in the market which drives the prices up.

The short term bulls are driven by good earnings of companies and announcements of positive future prospects of the company. Announcements such as mergers (CFC-Stanbic), Acquisitions ( Olympia, Scangroup, KPLC, EA Cables), Expansions ( KQ ) etc.

Long term bulls are driven by good economic sentiments. Lower inflation rates ( from double digits in 2006 to 5.9% in March 2007), growing GDP( 6% 2006), Increased investments both local and foreign which we are seeing currently in this country-Kenya.

When the bulls come home, it’s nothing but a party!!

However, one should watch for extended bull runs that result in overpriced stocks and corrections are inevitable.

Remember the 1st quarter of the NSE 2007?


The Bears
A bear market is when stock prices are moving down. There is a lot of pessimism in the market. Short term bulls are caused by poor earnings from companies ( Sameer Africa), negative publicity such as scandals and internal fraud ( Portland Cement), poor future earnings projections ( Eveready) etc.

Long term bears are driven negative economic sentiments. The converse of the Long term bulls.

When the bears come home, its trouble. But the party continues.

One can change positions from a long position to a short position. Short selling is not yet possible on the NSE but we are getting there.

Short selling is a technique used to sell high and buy low. On more sophisticated markets this can be done. Such as the NYSE now NYSE-EURONEXT.

Bears also present an opportunity to buy stocks that were previously overpriced from the bull runs.

After the correction at the NSE in the first quarter, opportunities to buy were present in abundance.

Remember, You haven't lost until you've sold.

Chickens

Chickens are just that. Chicken. They are afraid to lose anything so they opt to make investments in the money market.
They invest in bonds and T-Bills.

Pigs

Pigs are high-risk investors looking for the one big score in a short period of time. The speculators.
They are characterized by greedy and emotional decisions about their investments.

They are very impatient.
Informed traders love the pigs, as it's often from their losses that the bulls and bears reap their profits.

The bear run in the 1st quarter was absolute massacre of the pigs.

"Bulls make money, bears make money, but pigs just get slaughtered!" –investopedia.

Where do you stand?

Choose your investment strategy wisely.

The Battle

Its 6.00 am Kenyan Time. Half the country is a wake; half is still sleeping. Mama Mboga and their industry counter parts in Marikiti have already pushed 3 hours of work. Guards, police, customer care reps, nurses, doctors, factory workers etc are changing shifts from night shift to day shift.


Corporate players are up, well groomed, and skipping breakfast because if they don’t leave the house now, they will be late. The traffic these days is just too crazy. Kila mtu ana gari!!!



Back to the factory scene; “ toooot…” the shift has started. The HHIC is outside the gate picking out the casual labourer for the day. It looks like a political rally. There are just too many people.


“ Basi, hawa tosha. Wengine Kesho.” Says the HHIC. Tough luck.


HHIC??


Head Honcho In Charge.


We go up a few rungs of the ladder. The office is a buzz. “Got to crack that brief.” You think to yourself.

Emails are coming in quick succession:


From: HR.
Subject: Memo.


“Dare I even read it.”


From: Client
Subject: New Changes.


“Dame it! Can’t they decide?? I’m already finished with the last changes!!”


From: The forward friend
Subject: FW; FW; FW


“Kubaf!”


Before you delete the forward, your big boss gets a tongue lashing from the bigger boss, and makes a through pass to you.


“x#x*%)('?#”



And who does the work?

Its 10.30 am and half of the lot that was asleep is now awake.

Hustler Mbaya!!

Wasee wa barabara.

Meets client. Discusses what they need. Gets L. P. O using his friends company.

Off to down town. Buys supplies with all the money in his pocket but still owes 25%.

“I will pay when the cheque comes through.”

Delivers to client. Capice!

Easy money?

Clients reject the supplies. This is not what they asked for.

“Kimeumana!”


12.30 pm and the other half is now awake.

No job.

Off to Base.


5.30 pm. Overtime, rush hour traffic, the million man walk back home.

Another day bites the dust.

Tomorrow is a new battle.

Moral of the story:

1.” The trouble with being in the rat race is that even if you win, you're still a rat."
Lily Tomlin

2. “Be nice. Remember everyone you meet is fighting a hard battle."
John Watson


Join us in this journey towards financial freedom and the quest for life lessons that will make us better human beings.

Let us invest our time, effort and money into making ourselves and the people around us better people than we are today.

I wish you all a safe journey.