Acting on the Information

The final step in this process is deciding what actions to take. The timing of decisions is critical, but that is more true for short-term thinking than for the more studied long-term approach fundamental analysts need to adopt. The game plan should approximate the following scenario:

•   You invest in stocks after a detailed analysis of the fundamentals; a comparison among a field of likely candidates in specific industries; and a review of historical performance, financial strength, and return to shareholders.

•   The purpose in buying stocks is long term in nature. You will not sell merely because you face an opportunity for an immediate profit, or because the stock's market price falls. All actions following the purchase of stock will be to maintain and monitor.

•   The exception: when a trend changes. If a primary trend that led you to believe the stock was a worthwhile long-term hold were to change, you would consider selling. This will occur only when the trend is confirmed by other trends you watch.

This process is one that all investors may follow, assuming that the purpose in believing in fundamental analysis is because you already consider yourself a long-term investor. The market rewards shareholders. This is why the market is so popular, and why well managed portfolios are profitable over the long term.

In using graphs to map out trends based on ratio analysis, you have a three-part challenge. First, you need to ensure that you have selected the proper ratios for study. Watching the wrong fundamental indicators is of little value, so be prepared to switch from one form of analysis to another if your selected method does not work for you.

Second is the proper interpretation of results. As you begin to use moving averages and, perhaps, weighted averages when they add value to your study, you will become proficient at interpreting your trends, and you will be able to take action once information reveals itself.

Third, you do need to act on information—decisively and with confidence. Trust your decisions as long as they are based on the integrity of the underlying information, and you will not go wrong.