When it comes to investing, there are two major schools of thought: 1.) fundamental investing (also known as value investing) and 2.) technical investing (also known as trading). A technical investor asks what the market (deriving from outside) says the investment will be worth tomorrow; the fundamental investor asks what the investment is worth today, according to its intrinsic value (deriving from within).

For example, two investors go to a shopping mall. The fundamental investor goes to each store, studies the products, their use and cost, and then decides whether to purchase based upon the product’s perceived value. The technical investor sits on the mall bench and watches people go into stores. Never entering the stores, the technical investor bases his buying decision on the patterns and activity of people going into each store, noting what was bought.

Technical Investing

Technical investing asks the question, “How quickly can I sell/flip/trade and for how great a profit?” Technical investing does not look closely at the financial state of the investment, but rather where the property value might be in the future based upon what others will pay for it. Technical investors are primarily going to analyze price movement and market activity as a basis for investing. Technical investing considers many facets that may surely affect the investment but focus little on the investment itself. Value is derived from where the investment has been and where it is going, but not from within its current state.

A technical investor looking at a potential apartment investment might ask the following questions pertaining to the marketplace. What are others paying for similar apartment properties? Are there new apartments being built in the area? Are there new jobs being created nearby? Will the prices in the area go up? Is transportation convenient? Are the schools decent? What kind of crime is around the area? Is the apartment market going up? Notice how these questions concern external factors, but not the investment itself.

Fundamental Investing

Fundamental investing is concerned with deep analysis of an investment’s intrinsic value. Fundamental investors are generally looking to hold their purchases longer and are more concerned with acquiring an asset based upon inefficiency in the market valuation. Fundamental investors look at an apartment investment in its current state, the rental income, the expenses, and the immediate needs of the property. Fundamental investing is going to consult the financial performance of the investment’s internal factors to derive value.

A fundamental investor considering an apartment acquisition would ask questions pertaining to the investment’s performance and condition. Are the existing rents low? Are the expenses high? What is the story behind the apartment property? Is there a problem I can solve or value I can add? Are there management problems or deferred maintenance? What is the cap rate? Are the utilities separated? What is the physical condition of the property? What is the physical and economic occupancy? What is the current cash on cash return? All of these questions speak to the financial and physical condition of the investment as it is in its current state.

We find that our investment philosophy aligns more closely with fundamental investing, although we maintain a healthy pulse on technical investment factors surrounding our investment deals. It is important to establish an opinion on the technical factors that may affect our investment, and we certainly pay attention to them. The vast majority of our investment decisions, however, are based solely from within the investment itself. Our investing decisions are primarily based on a sound review and thorough understanding of the financial health of the investment and our confidence that we can solve what is lacking, so we are therefore seeking an intrinsic and independent valuation. Instead of trying to time the market, we choose to fundamentally evaluate potential investments through internal measurements deriving from within the investment itself.

To read from our favorite fundamental investors, check out Warren Buffett or Benjamin Graham. For more information on technical investors, check out George Soros or Charles Dow.