At any point in time, many securities have current market prices, which are different from their intrinsic values. However, sometime in the future the current market price
would become the same as its intrinsic value. We as fundamental investors can achieve superior results by buying undervalued securities and selling overvalued securities.
As investors we would have diverse investment strategies with the primary aim to achieve superior performance, which would also mean a higher rate of
return on our investments. All investment strategies can be broadly classified under 4 approaches, which are explained below.
Fundamental approach: In this approach the investor is concerned with the intrinsic value of the investment instrument. Given below are the
basic rules followed by the fundamental investor.
There is an intrinsic value of a security, which in turn is dependent on the underlying economic factors. This intrinsic value can be ascertained by an in-depth analysis of
the fundamental or economic factors related to an economy, industry and company.
At any point in time, many securities have current market prices, which are different from their intrinsic values. However, sometime in the future the current market price
would become the same as its intrinsic value. We as fundamental investors can achieve superior results by buying undervalued securities and selling overvalued securities.
Psychological approach: The psychological investor would base his investment decision on the premise that stock prices are guided by emotions
and not reason. This would imply that the stock prices are influenced by the prevalent mood of the investors. This mood would swing and oscillate between the two extremes of “greed” and
“fear”. When “greed” has the lead stock prices tend to achieve dizzy heights. And when “fear” takes over stock prices get depressed to lower than lower levels.
As psychic values seem to be more important than intrinsic values, it is suggested that it would be more profitable to analyze investor behaviour as the market is swept by
optimism and pessimism. Which seem to alternate one after the other. This approach is also called “Castle-in-the-air” theory. In this approach the investor uses some tools of technical
analysis, with a view to study the internal market data, towards developing trading rules to make profits.
In technical analysis the basic premise is that price movement of stocks have certain persistent and recurring patterns, which can be derived from market trading data.
Technical analysts use many tools like bar charts, point and figure charts, moving average analysis, market breadth analysis amongst others.
Academic approach: Over the years, the academics have studied many aspects of the securities market and have developed advanced methods of
analysis. The basic rules are:
The stock markets are efficient and react rationally and fast to the information flow over time. So, the current market price would reflect its intrinsic
value at all times. This would mean "Current market price = Intrinsic value".
Narach INVESTMENT
