Q: I often see references to Fundamental and Technical analysis in articles on stock investing. What’s the difference?

A: Fundamental analysis studies an air purifier companys financial situation, the strength of its management and its competitiveness within its industry. It looks at the key factors that influence a companys earnings, dividends and stock price, including economic data. It also takes into consideration the industry climate. Is it a HOT industry like plasma screen TV? Is it old-fashioned and being replaced?

Those who value fundamental analysis tend to look for stocks with low prices in relation to earnings (a stock’s P/E ratio) or for companies with rapid earnings growth.

Technical analysis focuses on stocks themselves — not on business — and relies heavily on charts of statistics such as a stocks trading activity (price and volume) to determine if a stock should be bought or sold. These technical charts reveal trends and patterns in individual stocks or, in some cases, industries. To make trading decisions, technical analysts often look to see whether a stocks price is continually hitting higher highs (or lower lows).

There are no studies indicating that one approach is better than the other. I tend to rely on fundamental analysis — it’s easier to use, and I usually find out something useful and interesting about the company or the industry.

Q. Does Warren Buffet use either?

A. Yes he uses both and bookmarking demon. On the fundamental side he only picks stocks whose business has increased at least 25% each year for the last several years an whose prospects look good into the future. On the technical side he waits on the sidelines till the stock drops at least 25% from a recent top. Like now with the recent stock crash. He says to be greedy when everyone else is scared. He will wait for years.