Investing Tip:

How Do You View The Future?

There are three main ways that investment analysts and individuals choose stocks. These are: technical analysis, fundamental analysis and value investing. How do you select which method? At it's most basic, it depends on how predictable you believe the future is.

Technical analysis is all about looking for patterns in past stock prices. In order to believe in technical analysis, you must accept two postulates. First you believe that people repeat the same patterns over and over. Second that you believe they repeat them in the same way. If this makes sense to you then technical analysis should be your main way to select stocks.

Fundamental analysis says that there are not patterns per se, but that by knowing what has happened in the past with a company (their earnings, their profits, their products) you can predict their success going forward in the future. This is the methodology used by the majority of investment analysts on Wall Street.

Value investing takes the position that the future isn't predictable. The idea is to look for companies where the value of the business is more than the actual stock price *right now*. What value investors are trying to do is buy a business on the cheap. This is the primary method used by Advanced Financial.

There are of course variations and combinations, but these are the fundamental ways to choose stocks. By understanding how you (or your professional advisor) view the future you'll know what methodology fits best.

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Donald Steinmann and Advanced Financial Management assume no responsibility for any actions taken due to comments made in The Investment Tip of The Week.

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"A good decision is based on knowledge and not on numbers."
-- Plato