Fundamental Analysis, Value Investing, and Growth Investing
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Benjamin Graham, the "father of fundamental investing," showed the way from speculation (based on tips, intuition , and guesswork) to investing as a disciplined, quantitative analysis of a company's fundamentals (such as earnings, dividends, assets, debt, financial structure, and the history of all these items over time). Graham's style , known as value investing, focuses on a company's intrinsic value (i.e.inherent value), buying stocks only when the market price is well below the intrinsic value per share. Benjamin Graham was himself a remarkably successful investor, and his prize student, Warren Buffett, applied Graham's principles to become perhaps the most successful investor in history. Growth investing seeks to spot companies entering a period of vigorous and rapid expansion. Pioneered by T. Rowe Price in the 1930's, this style has been well suited to capitalize on America's industrial boom after World War II, with the rise of such companies as Xerox, Microsoft, Blockbuster Video, Home Depot, and Liz Claiborne, In addition to finding specialized growth companies, Price specified several criteria for a growth industry. These are (1) high quality R & D; (2) limited competition; (3) few government regulations; (4) well-paid employees but low labor costs; (5) a strong possibility of high return on invested capital; and (6) superior growth in earnings per share. Growth investors must have the nerve to handle risk and the financial wherewithal to endure volatile market conditions.