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Fundamental Analysis is the process of reviewing financial statements, business prospects, management quality and corporate strategy with the goal of deriving the current value of a company or security. This sometimes involves using discounted cash flows to derive an intrinsic value. It is often associated with adaptive, subjective and artistic approaches to security selection.
Synonym: valuation analysis
For context, it's important to consider that public company filings which comply with regulatory and GAAP or IFRS standards can be hundreds of pages long. To illustrate, in the U.S., many 10-Ks exceed 200 pages. So the time it takes to review these and all of the information available about a company and its competitors is significant.
So a fundamental analyst may only have time to follow a few dozen companies. In the end however, the fundamental analyst should have more conviction than a quantitative analyst who summarizes a company using widely available ratios.
The difference between the two can be summarized as depth versus breadth. The fundamental analyst benefits from depth, but can only follow a limited number of securities with high conviction. The quantitative analyst benefits from breadth, by following a lot of companies, but with less conviction.
Kay: How would you characterize your
position? Top-down or bottom-up?
Ann: Hmm, I assume you mean the direction of our fundamental analysis.
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True, relative to Passive, Quantitative and Technical
False. All investors have their own unique subjective view.
Still unclear on Fundamental Analysis? Check out the financial modeling course in Excel with 27 videos, called Quant 101.
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