fundamental or value investment is what is advocated for long term investors...it entails proper understanding of Financial Statements..this is what Warren Buffet uses....How many pple in Wazua use this strategy...does it work 4 u guyz???

What does this mean - exactly & in simple language?

@mukiha value investment means buying cheap stocks that are mispriced by the market by analysing their financials

@mukiha are you sure you dont know this??? one gets all the financial information from for example the balance sheet and comes up with the ratios for example debt to equity ratio, price to book value ratio, and then gauge these ratios according to what the market considers cheap or expensive...

A case in point for a good value investment can be unga group... this stock is EXTREMELY CHEAP at the moment if one uses fundamental analysis of its balance sheet or income statement to value its stock... i think it is seriously being mispriced by the market because of its volatile earnings and no dividend policy it has being pursuing....

if one of these variables changes then you can/will expect to see a major price movement on a counter trading with such un heard of ratios

You cannot truely value a stock by simly using the balance sheet. In fact the balance sheet is the least important of the three statements in terms of information. The balance sheet will capture the inflows and outflows into the business lakini there are various ways ala enron companys use to keep important information from the raia.

Look at the income statement to see if the company is producing profits. Then look at the cashflow statement to see if the have liquid cash. This will also tell you the source of the cash. If it's from operations, thats great. If it from investing activities, there maybe issues. For example, KQs cash should come mostly from selling tickets, not selling old planes.

At the end of the day, you have to discount free cash flows to the present to get the intrinsic value of the stock. Then compare that to what the market value of the stock is. BUT, unfortunately for a young market like ours, we don't all have the same information. You may do all this analysis, buy a stock based on sound judgement but we know the regulators sleep on the job, and some relevent information will come to light rendering all your analysis useless kabisa.

@kenstat:
Since 1954; is that young?

@kenstat i find it hard to agree with you about the income statement and cash flow statement being more important than the balance sheet when making long term investments

although the cashflow and income statement are also important in decision making, they can seriously change even within a year as a result change in economic situation or events whereas the balance sheet gives a long term picture of business operations and sustainabilty...

in short the cashflow and income statements are ideal for short term investors but they are exposed to too many variables for me to use them extensively to gauge a company's long term perfomance...

Financial statements are about the past, not the future. How does one assess the future?

i mean lack of flow where mostly only people in Nairobi can afford to acces this information you are talking about and the more than half who have access to the information can't interpret it... hence most investing is done on an emotional basis or love for a certain company or simply rumours....

you are exactly right about financial statements reflecting the past... the only one with access to some future aspects is the balance sheet....

Accounts Payable: reflects future costs of the firm
Accounts receivable: reflects future income of the firm
Long term liabilities: reflects future interest and principal payments the firm has to make

Just an example...