Becoming a Confident Investor
Understanding the Difference Between Fundamental and Technical Investing
People often come to me asking how they can become a better investor, or even a professional one. One of the questions I ask is whether they know how to make money both when the market is going up and when it is going down.
For most people, the concept of making money when the market is going up is easy. However, many are stumped when thinking of ways to make money when the market goes down.
The answer lies in understanding the difference between fundamental and technical investing.
Rich dad said, “A fundamental investor reduces risk as he or she seeks value and growth by looking at the financials of the company.” For the fundamental stock investor, the most important consideration for selecting a good stock for investment is the future earnings potential of a company.
A fundamental investor carefully reviews the financial statements of any company before investing in it. He or she also takes into consideration the outlook for the economy as a whole, as well as the specific industry in which the company is involved, and the direction of interest rates.
Rich dad said, “A well-trained technical investor invests on the emotions of the market and invests with insurance from catastrophic loss.” For the technical investor, the most important consideration for selecting a good stock is based on the supply and demand for the company’s stock.
The technical investor studies the patterns of the sales price of the company’s stock, asking, “Will the supply of the shares of stock being offered for sale be sufficient, based on the expected demand for those shares?”
Isn’t that risky?
One of the reasons so many people think the subject of investing is risky is that most people are operating as technical investors, but don’t know the difference between a technical investor and a fundamental one.
Because stock prices fluctuate with emotions, technical investing seems risky to those who do not have a good financial education. They don’t understand fundamentals and have poor technical investing skills. And because they have no control over the direction of the companies they invest in, they’re susceptible to the whim of the markets.
Average investors feel like investing is risky because:
· They are on the outside looking in. If they don’t know how to read financial statements, they are totally dependent on the opinions of others.
· If they can’t read business financial statements, chances are their personal ones are a mess too. As rich dad said, “If a person’s financial foundation is weak, his or her self confidence is also weak.”
· Most people only know how to make money when the market is going up, and they live in terror of the market going down.
But with the right financial education, the reality is that both types of investing are not risky.
The confident investor
Rich dad used to say, “Investors need to be well versed in both fundamental analysis as well as technical analysis.” He would draw the following diagrams for me.
These diagrams are why Kim and I started The Rich Dad Company to develop products that help people become financially literate, and to teach their children to do the same.
With the right financial knowledge, understanding both technical and fundamental investing, you can invest confidently, knowing you can make money whether the market is going up or going down.
For a more in-depth look at technical investing, I especially recommend Rich Dad Advisor Andy Tanner’s book, Stock Market Cash Flow: Four Pillars of Investing and Thriving in Today’s Market .
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