Course index:
- Basic Concepts of Money and Personal Finance
Introduction to the value of money, the importance of saving, and spending control. - Budgeting and Financial Planning
Create a personal budget, manage income and expenses, and set financial goals. - Inflation and Purchasing Power
Explanation of how inflation affects the value of money over time. - Interest Rates and Time in Finance
Differences between simple and compound interest rates and their importance in investments. - How to protect your savings. Protect yourself from scams.
How to protect your money from the scams that abound today - Basic Savings Instruments
Explanation of savings accounts, term deposits, and how they work. - Introduction to the Stock Market
Basic concepts of the stock market and its role in the global economy. - Actions: What They Are and How They Work
Explanation of stocks, types (common and preferred), and how to invest in them. - Bonds: What They Are and How They Work
Differences between corporate and government bonds, and their importance in diversification. - Risk vs. Return on Investments
Concept of risk and how it affects investment choices. - Diversification and Creation of Basic Portfolios
Basic diversification principles to reduce risk in an investment portfolio. - What is an ETF and How Does it Work?
Introduction to ETFs (exchange-traded funds) and how they track market indices. - What is a Mutual Fund?
An explanation of mutual funds and their benefits for beginners. - Financial education for the family
All the information you need to make ends meet. - Economic Cycle and its Impact on Investments
How the stages of expansion and contraction in the economy affect investments. - Growth Stocks vs. Value Stocks
Learn about different types of actions and what to expect from each one. - Fundamental Analysis of Stocks <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
Explanation of how to analyze a company's value based on its fundamentals. - Basic Technical Analysis: Charts and Patterns
Introduction to basic technical analysis tools, such as trend lines and candlestick patterns. - Options: What They Are and How They Work
Basic concepts of call and put options and their uses in investments. - Futures: What They Are and How They Work
Introduction to futures contracts and their application in investment and speculation. - Introduction to Cryptocurrencies
What is digital money, how it was created, and the characteristics of Bitcoin and other cryptocurrencies. - Blockchain and its Importance in Finance
How the technology behind cryptocurrencies works and their applications in finance. - Risks in Cryptocurrency Trading
Volatility, fraud, and regulations in the cryptocurrency market. - Leverage Principles and its Risk
What it means to trade with leverage and the associated risks. - Investor Psychology and Emotion Management
How emotions influence investment decisions and tips for managing them. - What is Algorithmic Trading
Basic explanation of the use of algorithms to perform operations in the financial market. - Financial Analysis of Companies
Introduction to basic financial statements and their interpretation for valuing companies. - Investing in Commodities: Gold, Oil, and Other Goods
How commodity investments work and their role in diversification. - Advanced Investment Strategies: Hedging and Derivatives
Introduction to strategies for managing risks through financial derivatives. - Creating and Managing a Complete Portfolio
Practical application of prior knowledge to build and manage a diversified portfolio.
When you get into the world of investing, one of the first things you hear is that you need to do your research before buying stocks. There are different ways to do this, but one of the most respected and used is fundamental analysis. This method involves taking a deep look at a company to understand whether its real value is above or below its market value. It's not about guessing or following trends, but rather about studying numbers, businesses, and trends to make smart decisions.
In this lesson, we'll explore what fundamental analysis is, how it works, what tools it uses, and learn about some of the greats who made it famous, such as Benjamin Graham, Warren Buffett, Phillip Fisher, Peter Lynch, and other prominent value investors. If you want to invest with a solid foundation and not just by intuition, this will be of great interest to you.
What is fundamental analysis?
Fundamental analysis is like taking an X-ray of a company to see its financial health and whether it's worth investing in. Unlike technical analysis, which is based on charts and past price movements (we'll cover this in detail in the next lesson), fundamental analysis focuses on the company's real fundamentals: its earnings, debt, assets, how it manages its business, and the market conditions in which it operates.
The idea is to determine the company's "intrinsic value"—what it should be worth based on its numbers and prospects—and compare it to its stock price on the stock market. If the intrinsic value is greater than the price, it's a buying opportunity. If it's lower, it's better to pass.
This method isn't magic or something new. It was born decades ago with investors who wanted to go beyond speculation and base their decisions on concrete facts. Don't worry if you're not a financial expert: fundamental analysis can be learned with practice, and many use it to build long-term fortunes. The key is patience and understanding that you're not looking for quick profits, but rather to invest in companies with a solid future. Let's see how it's done and who perfected it.
How fundamental analysis works
Fundamental analysis begins with an overview of the company. It's not just about looking at the stock price today, but also understanding what it's doing, what market it's in, and how it's doing. For example, if you want to analyze a company like YPF, it's not enough to see if its stock has risen or fallen this week; you need to know if the price of oil is rising, if the company has manageable debt, or if it's expanding its operations.
Next, you turn to the numbers. Financial reports are the heart of fundamental analysis. The most important are the balance sheet, which shows the company's assets, liabilities, and equity; the income statement, which details profits and losses; and cash flow, which indicates how much money is actually coming in and going out. With this data, you calculate key indicators. For example, the price-to-earnings ratio (P/E) tells you how much you pay for each peso the company earns. If one company has a P/E of 10 and another has a P/E of 30, the former seems cheaper, but you have to consider the context, growth, and outlook.
Another indicator is return on equity (ROE), which measures how much a company earns from its shareholders' money. A high ROE, such as 151TP3Q or higher, suggests the company is using its capital wisely. You also look at debt: if a company has more debt than assets, it could be in trouble. And you analyze earnings growth: if they grow by 101TP3Q per year, it's a good sign. All of this helps you estimate intrinsic value, which you can calculate with formulas like the discounted cash flow formula or the Graham model, which we'll cover later.
But it's not all about numbers. Fundamental analysis also considers external factors, such as competition, the country's laws, changes in the economy, or consumer trends. For example, if a technology company like Mercado Libre relies on online sales, it's important to consider how e-commerce is growing in Argentina or if there are new regulations. This makes the analysis a comprehensive process, combining hard data with a bit of judgment.
Advantages and disadvantages of fundamental analysis
The beauty of fundamental analysis is that it gives you a solid foundation for investing. You don't rely on rumors or market movements, but on verifiable facts. If a company has good fundamentals, such as growing earnings and low debt, it's more likely to deliver long-term results. It also protects you from bubbles: if a stock's price is inflated by euphoria, but the numbers don't justify it, the analysis warns you not to buy.
But it has its challenges. First, it takes time and effort. It's not like looking at a chart and making a five-minute decision; you have to read reports, understand balance sheets, and follow the news. Second, the data can be outdated or manipulated, especially in less regulated markets like Argentina. Third, intrinsic value is an estimate: no one knows for sure how much a company is worth, and you can be wrong. That's why many people combine fundamental analysis with other tools, such as technical analysis, to get a more complete picture.
Benjamin Graham: The Father of Fundamental Analysis
If there's one name that shines brightly in the history of fundamental analysis, it's Benjamin Graham. Born in London in 1894 and raised in the United States, Graham is considered the father of value investing, a philosophy that uses fundamental analysis to find undervalued companies. His most famous book, "The Intelligent Investor," published in 1949, is a bible for investors and remains relevant today. In it, Graham teaches you to buy stocks as if you were buying a piece of a business, not just a piece of stock that goes up or down.
Graham developed the concept of the "margin of safety," which is the difference between a company's intrinsic value and its stock price. For example, if you estimate a company's value at 100 pesos per share, but it's actually at 70 pesos, that 30-peso margin protects you if something goes wrong. He also created a formula for estimating intrinsic value, based on earnings, growth, and dividends, which used indicators such as P/E and expected growth. His approach was conservative: he looked for solid companies with low debt and stable earnings, and bought them only if they were cheap.
One of his most famous students was Warren Buffett, whom we'll discuss later. Graham also founded one of the first investment firms with his partner David Dodd, and his book "Security Analysis" (1934) is a technical manual for analyzing companies. He died in 1976, but his legacy lives on in value investing, and many investors still use his ideas to find hidden treasures in the stock market.
Suggested further reading:
Warren Buffett: The Disciple Who Surpassed the Master
Warren Buffett is probably the world's best-known investor, and much of his success comes from applying Benjamin Graham's fundamental analysis. Born in 1930 in Omaha, Nebraska, Buffett began investing as a child and met Graham in the 1950s while a student at Columbia University. He worked with him and adopted his value philosophy, but added his own twist. While Graham bought any cheap company, Buffett focused on companies with understandable businesses, strong brands, and competitive advantages, which he calls "economic moats."
Buffett is famous for leading Berkshire Hathaway, a company that started out buying textiles and now owns shares in Coca-Cola, Apple, American Express, and more. His strategy is to buy companies at reasonable prices and hold them for decades, relying on their fundamentals. He uses fundamental analysis to assess intrinsic value and only invests if the margin of safety is clear. For example, in 2008, when the financial crisis hit, Buffett invested in Goldman Sachs because he saw its fundamentals were solid, and he made millions when the market recovered.
One of his most famous quotes is: "Price is what you pay, value is what you get." This sums up his approach: he doesn't care whether a stock is hot, but rather whether its real value justifies the price. With a fortune exceeding $100 billion (according to recent estimates), Buffett is a living example of how fundamental analysis, combined with patience, can generate enormous wealth. He is also known for his humility and for donating a large portion of his fortune through the Gates Foundation.
Suggested further reading:
Phillip Fisher: The Focus on Growth
While Graham and Buffett focused on value, Phillip Fisher brought another perspective to fundamental analysis: growth. Born in 1907 in San Francisco, Fisher was one of the first to highlight the importance of companies with growth potential. His book "Common Stocks and Uncommon Profits" (1958) is a classic that teaches how to invest in companies with innovative products, strong management, and growing markets, even if their prices are high.
Fisher developed a qualitative approach to fundamental analysis. He looked not just at numbers, but at how the company worked internally. For example, he investigated the quality of the management team, the ability to innovate, and customer loyalty. He argued that a good company could be worth more even if its P/E was high if its future growth was promising. An example of his style would be investing in a company like Texas Instruments in the 1950s, which was growing with new electronic products.
Unlike Graham, who sought out bargains, Fisher was willing to pay more for companies with a bright future. His philosophy influenced Buffett, who later combined Graham's value with Fisher's growth. Fisher died in 2004, but his legacy lives on among investors who invest in long-term companies, like today's technology companies.
Suggested further reading:
Peter Lynch: The Everyday Investor
Peter Lynch is another giant of fundamental analysis, known for his practical and accessible approach. Born in 1944 in Boston, Lynch rose to fame as the manager of Fidelity Investments' Magellan fund between 1977 and 1990, where he achieved an average annual return of 291% (TP3T). His book "One Up on Wall Street" (1989) teaches ordinary investors how to find opportunities using fundamental analysis in everyday things.
Lynch believed that anyone could be a good investor if they paid attention to their surroundings. For example, if you notice a store like Walmart growing in your neighborhood, you can research whether its stock is cheap. His strategy was to buy companies he understood, with good fundamentals (earnings growth, low debt, reasonable prices) and hold them as long as they remained solid. He said, "Invest in what you know," and that set him apart from investors who only followed numbers or trends.
Lynch also used a hybrid approach: combining value (seeking low prices) with growth (betting on companies with potential). During his tenure, he invested in companies like Taco Bell and Ford, making millions by identifying trends before others. He retired young and left a legacy of simplicity: fundamental analysis is not just for experts, but for anyone with curiosity and discipline.
Recommended further reading:
Other notable value investors
In addition to Graham, Buffett, Fisher, and Lynch, there are other value investors who made their mark with fundamental analysis. One of them is John Templeton, born in 1912 in Tennessee. Templeton pioneered global investing, seeking out undervalued companies in emerging markets like Japan and Hong Kong in the 1950s and 1960s. He founded the Templeton Growth Fund and used fundamental analysis to find opportunities where others didn't. His phrase "the moment of greatest pessimism is the best time to buy" reflects his strategy of buying cheap in crises, as he did in 1939 when he invested in European stocks at the start of World War II.
Another important name is Charlie Munger, Warren Buffett's close partner at Berkshire Hathaway. Born in 1924, Munger brings a broader perspective to fundamental analysis, integrating psychology and business. While Buffett focuses on numbers, Munger looks for companies with "moats" (competitive advantages) and strong cultures. His influence led Buffett to diversify beyond pure value, including growth companies like Apple.
There's also Seth Klarman, a contemporary investor known for his book "Margin of Safety" (1991). Klarman, who runs the Baupost Group, follows Graham's style by seeking out undervalued companies with a clear margin of safety. He famously avoided market euphoria and kept a large portion of his portfolio in cash during bubbles, which protected him during crises like the one in 2008.
Recommended further reading:
How these investors apply fundamental analysis
Each of these investors uses fundamental analysis in their own way, but they all share a fact-based approach. Graham did so with mathematical discipline, using formulas and margins of safety to minimize risks. Buffett combined it with a qualitative approach, choosing companies he understands and that have lasting advantages. Fisher focused on growth potential, researching management and innovation. Lynch, on the other hand, did so on a day-to-day basis, using his environment to find opportunities.
A practical example would be how to analyze a company like YPF with his style. Graham would look at the P/E, debt, and assets to see if it's undervalued. Buffett would assess whether it has a "moat" in the energy market and if its brand is strong. Fisher would investigate whether its management is innovating in renewable energy. Lynch would ask if people are still buying fuel at its stations. They would all come to different conclusions, but based on fundamentals.
Tools and techniques of fundamental analysis
To apply this method, there are specific tools you can use. Financial reports (balance sheet, income statement, cash flow) are the starting point, available on company websites or from regulators such as the CNV in Argentina or the SEC in the United States. You can also use ratios such as P/E, P/B, ROE, and debt-to-equity to compare companies.
Another technique is discounted cash flow (DCF) analysis, which projects future earnings and adjusts them to present value. It's complex, but it gives you an idea of intrinsic value. Additionally, reading news, annual reports (10-K in the US), and speaking with experts gives you context. In Argentina, with the volatility of the dollar and inflation, you also need to look at macroeconomic indicators, such as Central Bank rates or the exchange rate.
Practical example of fundamental analysis
Let's imagine you want to analyze Mercado Libre. First, you look at its income statement: in 2023, its revenue grew by 301% Q3P due to increased online sales. The P/E is 50, high for a value stock, but typical of growth. The ROE is 151% Q3P, which shows good profitability. Debt is manageable, and cash flow is positive. Then, you investigate: e-commerce is growing in Argentina, and the company is innovating with fast shipping. Conclusion: it has solid fundamentals for growth, but the high price makes it risky if rates rise.
Conclusion: Fundamental analysis as a path to success
Fundamental analysis is a powerful tool for investing wisely, based on understanding the true value of companies. Thanks to pioneers like Benjamin Graham, who structured it with his margin of safety; Warren Buffett, who refined it with his long-term vision; Phillip Fisher, who focused it on growth; and Peter Lynch, who made it accessible, today we have a proven method that generates fortunes. Others like John Templeton, Charlie Munger, and Seth Klarman added nuances, from global investing to extreme caution. It's neither easy nor quick, but with practice and patience, it allows you to make informed decisions and build wealth over time.
Next course date
Questions for you to reflect on
Did you know that at El Inversor de Bolsillo we offer mentoring based on value analysis?
If the stock I analyzed is cheap... should I be worried if it drops in price shortly after I buy it?
Does fundamental analysis make sense?
A brief overview of The Pocket Investor
The Pocket Investor is a project that combines experience and passion for financial education to help you transform your relationship with money. Through personalized mentoringWe help you design investment strategies tailored to your goals and needs, optimizing your portfolio to address challenges like inflation and the dollar.
The books on finance and investment, including the popular The Argentine Pocket Investor - El Inversor de Bolsillo argentino, are practical tools that explain complex concepts in a simple way, bringing the world of investments closer to anyone interested in financial growth.
See more notes from our blog:
-
25 – Investor Psychology: How to Keep a Cool Head and Win in the Long Run
In this lesson, we'll discuss how investor psychology is key. We'll look at how to keep a cool head in difficult times and thus be successful in the long run.
-
A 17 años del Inolvidable Día Más Volatil del Dow Jones
October 10, 2008, was the most volatile day in history for the Dow Jones Industrial Average, moving more than 1,000 points in a single day. It fell as low as -8.1% and by the end of trading, it had recovered to just -1.49%. Let's look at the full story of these turbulent days of the subprime crisis.
-
Pampa Energía: El Sorprendente Ascenso a Wall Street 16 Años Atrás
On October 9, 2009, Pampa Energía, a leading energy company in Argentina, began trading on the New York Stock Exchange. Let's take a look at the company's complete history.
Aeronautics saving Apple Financial Advisor banks Berkshire Hathaway Stock market bonds bubble Dot-com bubble byma commodities South Sea Company Financial advice Cryptocurrencies crisis subprime crisis free finance course economy Start investing pyramid scheme USA scams Facebook finance Personal finances IBM inflation England finance books investment books LTCM financial mentoring Argentine market stock market international market Microsoft Nasdaq Oil Russia Steve Jobs Technology value investing Wall Street Warren Buffett
