The analytical tools and frameworks professionals use to evaluate opportunities and manage risk. Understanding the methods helps you evaluate advice.
Different methodologies suit different investment styles and time horizons. There's no universally "correct" approach.
Focus on intrinsic business value
Focus on price patterns and momentum
Most successful investors blend approaches. Fundamental analysis identifies what to buy; technical analysis can help with timing. Neither works perfectly—markets are simply too complex for any single methodology to capture all relevant information. The key is understanding each tool's strengths and limitations rather than treating any approach as gospel.
Markets exhibit recurring patterns—not because of some mystical force, but because human psychology remains consistent across generations. Fear and greed create predictable behaviors that show up in price charts.
However, recognizing patterns is far easier in hindsight than in real-time. The same chart formation that preceded a major rally in one instance may precede a crash in another. Context matters enormously.
Riding established momentum until clear signs of exhaustion. Works best in strongly trending markets.
Betting that extreme moves will correct back toward average levels. Requires patience and risk management.
Entering when price escapes established ranges. High failure rate compensated by occasional large wins.
Buying at support, selling at resistance within defined channels. Works until the range breaks.
Risk isn't a single number. It's a complex, multi-dimensional concept that manifests differently across asset classes, time horizons, and market conditions.
Market-wide risk that affects all securities. Cannot be eliminated through diversification—when markets crash, nearly everything falls together. Factors include economic recessions, interest rate changes, geopolitical events, and pandemic-level disruptions. The only protection is reducing overall exposure or using hedging instruments.
Company or sector-specific risk that can be diversified away. A single company's scandal doesn't affect unrelated holdings. This is why broad index funds are popular—they automatically provide diversification.
The risk of being unable to sell when you need to, or being forced to accept unfavorable prices. Smaller stocks and alternative investments carry higher liquidity risk.
Particularly relevant for South African investors. Offshore investments gain or lose value not just from asset performance but from Rand movements against foreign currencies.
The silent wealth destroyer. Returns that look positive in nominal terms may be negative after accounting for inflation. Conservative cash positions feel safe but guarantee purchasing power erosion over time.
Having too much exposure to any single position, sector, or theme. Feels comfortable during good times, devastating when the concentrated bet goes wrong. Position sizing matters.
Structured approaches to evaluating investments help remove emotional bias and ensure consistent analysis.
Discounted Cash Flow (DCF) analysis attempts to determine what future earnings are worth today. A rand received next year is worth less than a rand today because you could invest today's rand and earn returns. DCF models project future cash flows and discount them back to present value.
DCF models are only as good as their inputs. Small changes in growth rate or discount rate assumptions create massive changes in calculated value. The false precision of a specific number can create overconfidence. Professional analysts using DCF often disagree widely on the same company.
Relative valuation compares metrics like Price-to-Earnings (P/E), Price-to-Book (P/B), or Enterprise Value to EBITDA across similar companies. If a company trades at 10x earnings while competitors trade at 15x, it might be undervalued—or there might be good reasons for the discount.
Price divided by earnings. Higher ratios suggest growth expectations; lower ratios may indicate value or problems.
Price divided by book value. Useful for asset-heavy businesses and financial institutions.
Enterprise value divided by operating earnings. Allows comparison regardless of capital structure.
Factor analysis breaks down portfolio performance into exposure to various systematic factors. Academic research has identified several factors that historically explain returns beyond the overall market.
Nobody knows what will happen. Scenario modeling acknowledges this uncertainty by evaluating investments under different potential future states. Rather than predicting, it prepares.
Economic growth exceeds expectations, company executes flawlessly, margins expand. What's the upside potential?
Things proceed roughly as expected. Reasonable growth, normal competitive pressures, no major surprises. Most likely outcome.
Economy weakens, execution stumbles, competition intensifies. How bad could things get? Can you tolerate this outcome?
Understanding methodologies is step one. Applying them consistently requires practice and feedback.