To Invest Do I need to Know Beta and Option Pricing?

Investors Happy that they Don't Know Beta and Option Pricing

"To invest successfully, you need not know understand beta, efficient markets, modern portfolio theory, option pricing, or emerging markets. You may, in fact be, better off knowing nothing of these. That of course, is not prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices."

Warren Buffett

What is the Differences Between Fundamental and Technical Analysis?

Fundamental Analysis:

Picture Depicts the Concept of Fundamental Analysis

Fundamental analysis is a thorough analysis of company carried out with the intention of buying the shares for long-term investment. It is based on studying the profitability of the operations, assets and liabilities position, cash flows, etc., going as far back into the past as possible. During the process a number of important ratios as under are derived and used:

1. Profitability Ratios: EBDITA, EBT, PBT and PAT margins.
2. Liquidity Ratios: Current and Quick Ratios.
3. Long term Leverage Ratios: Debt-Equity and TOL/ TNW.
4. Market Conditions: PE Ratio, Price to Book Value, Dividend Yield, Distance fro 52 week-low. Five-Year Returns.

Picture Shows Fundamentals of Infosy Share

Technical Analysis:

Technical Analysis is the charting the price movements and attempting to interpret short-term market behaviour of stock with intention of making a profit from trading in stocks, commodities and currencies and their derivatives.

Candle Stick Chart of Infosys Ltd. Share from May to October 2016

Differences between Fundamental and Technical Analysis:

Differences Between Fundamental and Technical Analysis
Sl. No.	Fundamental Analysis	Technical Analysis
1	Rational Science	Pseudo Science
2	Current Market Price is one of the inputs	Market prices and their movements is the only input – facts relating company’s performance are not relevant
3	Used for evaluating fitness of stocks for long term investment	Used for taking short terms positions
4	Does not involve market prediction	Prediction of future market behavior is the sole purpose of technical analysis
5	Used by investors	Used by day traders and margin traders
6	Primarily intended for taking delivery of scrips	Not intended for taking delivery – trades are primarily meant to be squared-off within the same day or by the end of the contract period
7	Only relates physical shares	Primarily relates derivatives like futures and options but also involves physical shares in the intra-day trading

Conclusion:

While fundamental analysis is an exacting and rational discipline, technical analysis is a false study endeavouring to derive legitimacy from the use of charts and graphs and the lofty sounding name. Whatever realisation of predictions may be owing to the innumerable practitioners acting according to the interpretation of the pattern and not directly caused by the pattern – something akin to divination of future employed in the ancient times.