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Investing, like most other things, requires that you have a general philosophy about how to do things in order to avoid careless errors. Since all individuals differ in their own unique ways, their philosophies too differ from each other. What might have worked for Mr. Warren Buffet might not have worked for Mr. Peter Lynch.
The point that I am trying to make is that every investor should have a strategy of his own.

Many Fundamentalists rightly believe that when you buy a share of stock, you are buying a proportional share in a business. So stock selection, according to them, is determined purely on the financial health of the company, i.e., its cash flow, dividends, liquidity, returns on capital, book value, etc. There are several steps associated with fundamental analysis following which decent returns can be earned over a period of time.

Over the last few decades, tonnes of research papers have been published by various Analysts on Equity Analysis. These Analysts can be broadly classified into seven categories, i.e., Value Investors, Growth Investors, Income Investors, GARP Investors (Growth at a Reasonable Price), Quality Investors, Momentum Investors, and of course, CANSLIM Followers. The logic behind their mandate is quite similar to one another, and more often than not, Analysts use a combination of the above-mentioned techniques to forecast future earnings and growth.

For the sake of simplicity, we'll analyze only the common links between these techniques.

The first and the most talked about in financial circles is Book Value of a share. The book value of a company is theoretically what a company could be sold for, i.e., its liquidation value. Many times when investors refer to book value, they actually mean book value per share, which is the shareholder's equity (or book value) divided by the number of shares outstanding. Though there are many stocks which have a book value higher than that of its market value, but on the whole such companies have poor financial health and can be considered penny stocks.

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* Contributed by -
Nidhi Sharma,
MBA (Global), Batch 2005-07,
IMT, Nagpur.