Rational Investing

Written by: Scott Sery

When approached emotionally investing is a big and scary topic.  There are the ups and downs of the market to worry about.  There are thoughts of getting into the wrong investment and not making enough on the return, or even worse losing everything.  With so many things to worry about, many people do not even invest.  Rather than worry about what the market might do, there are many better approaches a person can take to rational investing.  Some time spent studying the investments will yield numerous logical places to money for the maximum return.

Technical Analysis

By studying the past movement of a stock, specifically how price and volume are related, a person can fairly accurately determine if it is set to go up or down.  Technical analysis helps the investor to focus on moving averages and then find when the stock is under priced or overpriced.  From there they can make an educated guess as to whether or not they should invest.

Fundamental Analysis

Often this is paired with technical analysis.  When performing fundamental analysis the investor is researching a company’s fundamentals, that is looking at the financial statements, what the company is doing in the world, and seeing whether or not any recent management changes have made a difference. Doing so a person can know how financially fit the company is.  A healthy company will be more likely to increase in price and follow historical trends.

Quantitative Analysis

Delving deeper into the complexity of studying stocks one will find him or herself doing quantitative analysis.  Using mathematic probabilities and statistics the investor can attempt to predict the movement of the stock price.  While it is similar to technical analysis, quantitative analysis employs formulas rather than watching trends.

Qualitative Analysis

Quantitative is often used side-by-side with qualitative analysis.  Much like fundamental analysis this method looks at subjective information.  By studying insights into the company such as how long the CEO has been around, how the company is managed, what they are doing in the community and a whole host of other factors, the investor can know how healthy the company is, and how likely they are to succeed.

There are many ways to analyze a company to determine if they have a good business model.  There are just as many ways to analyze the company financials to see if their bottom line is performing well.  Once determined there are numerous ways to study stock prices, and all the little nuances that come with them.  In the end, the rational investor can spend a great deal of energy determining just what stock to invest in, and when to get in and out.  Since most people do not have the time to spend on the analysis, there are companies that will do it for them.  Then they package all the stocks together and sell them in bundles called mutual funds.  By letting the fund company do all the heavy lifting, an investor is investing practically.


Rational Investing

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