Visualizing fundamental investing

Anything that has the ability to move on its own has fundamentals. Businesses too have fundamentals. What exactly are fundamentals? Fundamentals are measurements that usually helps us to see if someone or a business is doing well or not well.

A business has a couple of measurable facts that help to tell the management(insiders) and investors(outsiders) on how things are going. You can think of the measurements like the instruments found inside an airplane's cockpit. Gauges to measure airspeed, attitude, altitude, direction bearing and fuel tank level.

cockpit with instrument gauges

Image credit: by @arstyy

For business, the fundamentals come forth as a financial statement instead of instrument gauges. Cash flow, debts, earning per share, etc.

The most important of the instrument is the direction where the airplane or business is heading to. The management is like the pilots (CEO, COO, etc) and it is their job to take corrective action in case of any deviation from the norm in any fundamentals signals. The investors are like passengers inside the plane, they bought tickets to be part of the flight and hope to reach their intended destination safely and smoothly.

investors are like passengers in plane

Image credit: by @colepatrick

Being an investor, our job is to select the airplane that hopefully will bring us to a better destination ( more money by the end of the journey ) and not the plane that will cause us to lose money and pants.

If any important or all fundamentals are falling apart rapidly, the passengers usually don't have much choice except to bail out before the plane crash( i.e sell their shares ) or stick around hoping that the pilots(management) can take corrective action to rectify the situation.

Sometimes, due to external reasons. Some passengers will panic and bail out. If you choose to board the airplane with good fundamentals while the panicky passengers bailing out. Chances are high that you will make a good profit.

Investing is a role or job that require us to understand the financial statement of a business to measure the fundamentals and see who or what is driving the business(piloting the airplane) and to which direction or destination the business is heading to.

With the information gathered on a business fundamental. Your next call is, do you want to be a passenger ( i.e do you want to invest into the business)?

p/s: Can the management fudge the fundamentals? Unfortunately, yes. A good case study will be Enron. This is where technical investing come next.

Preview image credit: by @groosheck

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By AdamNg

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