Fundamental analysis

Fundamental analysis attempts to value an investment. Generally, the analyst estimates the expected future cash flow of the investment, and uses projections of interest rates to assess the present value of the cashflow. Linear projections based on five year averages are usually adequate.

A crucial real-life concern of an investor should be to obtain a large margin of safety when making an investment. It is well known that projecting future earnings and interest rates is unreliable.

Another complementary method is to interview employees, competitors, vendors and customers about a company. Often these people will know as much or more about a company than its management, and they have less reason to lie. The goal of this should be to determine if the company had good practices, and whether its management is honest.