The Finance Professor: Fundamental Stock Trading

Not every investor or trader will execute the same strategy when attempting to make money in the stock market. While everyone will insist that their way is the best market strategy, I believe that you need to stick to the approach that best fits your talent and experience.

I categorize investing/trading styles into four different categories:

1. Fundamental : Decision making based on quantitative analysis of the company's financial information and qualitative analysis of its business, competition and economic environment.

2. Technical : Using stock charts and chart patterns to discern trading decisions ("Chart of the Day").

3. Statistical: Developing trading models derived from a database of multiple variables.

4. Arbitrage: The simultaneous purchase and sale of a security, securities or derivatives in order to extract a low-risk profit.

My personal style is to primarily utilize a fundamental approach to investing. In addition, I have developed a series of statistical index trading models, which I also trade on, but this accounts for only a fraction of the assets I manage. From time to time, I will also employ arbitrage techniques as well as incorporate technical analysis when making a trading decision or risk-managing a position. For this installment of the Finance Professor, I will focus on the fundamental approach to investing.

Are You Interested in Growth or Value?

There are two primary schools of thought to fundamental investing: growth and value.

Fundamental Investing: Growth. If you consider yourself a "growth investor," then you are concerned with the rate at which a company will increase its earnings stream over a period of time. Growth investors seek out companies with accelerating or high levels of sustained growth, while companies with declining growth rates will be avoided. As an example, Apple (AAPL) is regarded as one of the best growth stocks in the market today. TheStreet.com Ratings reports that Apple has grown earnings per share (EPS ) at a rate of 62% in the last 12 months. Currently, estimates indicate that Apple will grow EPS at a rate of 56% in the fiscal year 2007.