How to conduct fundamental analysis and invest wisely

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Relying on social media platforms, self-proclaimed investing gurus and online forums for investment recommendations can be disastrous. Whether you’re assessing the potential of a company or analyzing your existing portfolio, fundamental analysis is the best barometer for gauging the true value of any investment. Learn the five key steps of conducting fundamental analysis and making informed investment decisions about companies you are interested in.

1. Review public reports – When you have found a company that best fits your investment objectives, the first step is to research and understand how the company makes money and any business risks it faces. You can gain a better understanding of that by reviewing public reports on the company’s website or those available on SEDAR (i.e. the filing database for the Canadian Securities Administrators) or EDGAR website (i.e. U.S Securities and Exchange Commission’s SEC filing database).

2. Understand the company’s financials – Once you feel confident in the company’s business, the next move is to understand the company’s financials. This information can be found in the company’s publicly available annual reports. These reports will help you learn about the company’s debt and obligations as well as its net income at the end of the quarter or year. Additionally, you can learn about the company’s return on equity, which can help you determine if it’s using its investment money responsibly.

3. Explore the company’s industry – Next, you want to explore the company’s business landscape. At this stage, you can learn about the innovations, disruptions, and opportunities facing the company’s industry. This is also a great time to understand the company’s competitors and whether it has the right products and services to compete.

4. Examine the company’s leadership – You should examine the company’s leadership, including board members and executive team. The purpose of this step is to understand if the company’s leadership has the right experience and management style to make the critical decisions for the company’s success.

5. Finalize your research with trusted and experienced resources – Once you have conducted all of the preceding steps, you can round out your research with additional insights and perspectives on the company. Utilizing information provided by reputable sources like Bloomberg News, Morningstar.ca, TMX.COM and NASDAQ.com, you can uncover any risks you may have missed during your research or additional growth opportunities. Remember to avoid the temptation of confirmation bias and consider all expert opinions and not just the ones aligned to your own opinion.

The excitement around investing continues to grow, with speculation, social media hype, and ongoing news coverage stoking frenzied investor sentiment. While fundamental analysis will never guarantee investment returns, it will help you move past the online noise and provide you with the knowledge to make informed investment decisions.

Active Investing: Understanding the basics

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Investing is a wealth-building tool that can be as involved or as hassle-free as you want. Active investing is a hands-on approach in which either you or a financial advisor acting on your behalf invests with the objective to outperform the market’s average returns. Passive investing involves investments in funds like exchange-traded funds and indexes that track and invest in the entire stock market and require little to no involvement from the investor to achieve average market returns.

For those interested in a more hands-on approach to investing, the active investing strategy may be more appropriate. Learn more about active investing and what you should consider before adopting this strategy.

Research is fundamental

Active investing comes in many forms, whether it is stock-picking on your own or through actively managed investment funds or portfolios created by financial advisors. The key to being successful at active investing is researching the fundamentals of any investment and ensuring that it meets your risk tolerance and aligns with your financial plan. Elements of this research include performing a comprehensive analysis of the company’s financial statements and other public reports to understand its business, revenue, cash flow, and debt etc.

It’s all about balance

When assessing the fit of an investment within a portfolio, investors or financial advisors are tasked with ensuring that it does not impact the overall balance. For example, if you invest in a company already held in an index fund you own, you are unknowingly increasing your investment in that company for better or worse. Suppose you buy too much stock in the technology sector, for instance. In that case, you may imbalance your portfolio towards that sector and see greater losses if that industry has a downturn, more so than a broadly diversified or balanced portfolio.

Know the risks

Generally speaking, active investing can yield higher returns but also carries with it higher risk. Even with comprehensive analysis, investors are not guaranteed high returns through picking individual stocks. In fact, more often than not, they underperform the market. The buying and selling of stocks can also expose you to cognitive or behavioural biases that can cause you to sell your investments at the worst of times or take on more risk than you are willing or comfortable to accept normally.

Active investing can be a great way to grow your wealth but is far more complex and involved than a passive approach. Fortunately, you are not restricted to any one strategy and can implement a blend of both passive and active strategies to create a portfolio that aligns with your unique financial plan, risk tolerance and goals.