ABSTRACT

In the course of years of stock market study, two quite distinct schools of thought have arisen, two radically different methods of arriving at the answers to the trader’s problem of what and when. In the parlance of “the street,” one of these is commonly referred to as the fundamental or statistical, and the other as the technical. (In recent years a third approach, the cyclical, has made rapid progress, and although still beset by a “lunatic fringe,” it promises to contribute a great deal to our understanding of economic trends.)

The stock market fundamentalist depends on statistics. He examines the auditors’ reports, the prot-and-loss statements, the quarterly balance sheets, the dividend records, and policies of the companies whose shares he has under observation. He analyzes sales data, managerial ability, plant capacity, and the competition. He turns to bank and treasury reports, production indexes, price statistics, and crop forecasts to gauge the state of business in general, and reads the daily news carefully to arrive at an estimate of future business conditions. Taking all these into account, he evaluates his stock; if it is selling currently below his appraisal, he regards it as a buy. (EN9: And, no surprise, the buyer’s name is Warren Buffet, and he buys the company, not the stock, for although this is an excellent way to buy companies, it is not a very good way to buy stocks.) EN: Read Robert Prechter’s summation of the fundamental methodology as an amusing endnote at the end of this chapter.