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Pre-Agreement Analysis



This guide describes all the steps, processes, and scope of the Pre-Agreement Analysis.


1. Pre-Agreement Analysis


Term for many different methods of evaluating the current structure of a company, the feasibility of making an investment, industry sectors, and economic trends. It can include charting past returns to predict future performance, selecting the type of investment that best suits an investor's needs, or evaluating individual securities such as stocks and bonds to determine their risks, yield potential, or price movements.


  • The pre-agreement analysis involves researching and evaluating a business or industry to predict its future performance and determine its suitability for a specific investor.

  • Pre-agreement analysis may also involve evaluating or creating an overall financial strategy.

  • Types of pre-agreement analysis include bottom-up, top-down, fundamental, and technical.


2. Understanding Pre-Agreement Analysis

The aim of the pre-agreement analysis is to determine how an investment is likely to perform and how suitable it is for a particular investor. Key factors in the pre-agreement analysis include the appropriate entry price, the expected time horizon for holding an investment, and the role the investment will play in the portfolio as a whole.

In conducting the pre-agreement analysis of a mutual fund, an investor looks at how the fund performed over time compared to its benchmark and its main competitors. Peer fund comparison includes investigating the differences in performance, expense ratios, management stability, sector weighting, investment style, and asset allocation.

the pre-agreement analysis, one size does not fit all. Just as there are many different types of investors with unique goals, time horizons, and incomes, there are investment opportunities that match those individual parameters.

3. Strategic Thinking

The pre-agreement analysis can also involve evaluating an overall investment strategy in terms of the thought process that went into making it, the person's needs and financial situation at the time, how the portfolio performed, and whether it's time for a correction or adjustment.

4. Types of Investment Analysis

While there are countless ways to analyze securities, sectors, and markets, investment analysis can be divided into several basic approaches.

5. Bottom-up investing

Bottom-up investing is an investment approach that focuses on analyzing individual stocks and de-emphasizes the significance of macroeconomic and market cycles. In other words, bottom-up investing typically involves focusing on a specific company's fundamentals, such as revenue or earnings, versus the industry or the overall economy. The bottom-up investing approach assumes individual companies can perform well even in an industry that is underperforming, at least on a relative basis.

6. Top-Down Investing

Top-down investing is an investment analysis approach that focuses on the macro factors of the economy, such as GDP, employment, taxation, interest rates, etc., before examining micro factors such as specific sectors or companies.

7. Top-Down vs. Bottom-Up

When making investment decisions, investors can use a bottom-up investment analysis approach or a top-down approach.

Bottom-up investment analysis entails analyzing individual stocks for their merits, such as their valuation, management competence, pricing power, and other unique characteristics.

Bottom-up investment analysis does not focus on economic cycles or market cycles. Instead, it aims to find the best companies and stocks regardless of the overarching trends. In essence, bottom-up investing takes a microeconomic approach to investment rather than a macroeconomic or global approach.

The global approach is a hallmark of top-down investment analysis. It starts with an analysis of the economic, market, and industry trends before zeroing in on the investments that will benefit from those trends.

8. Fundamental Analysis

Fundamental analysis (FA) measures a security's intrinsic value by examining related economic and financial factors. Fundamental analysts study anything that can affect the security's value, from macroeconomic factors such as the state of the economy and industry conditions to microeconomic factors like the effectiveness of the company's management.

9. Technical Analysis

Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume. Unlike fundamental analysis, which attempts to evaluate a security's value based on business results such as sales and earnings, technical analysis focuses on the study of price and volume.

10. Fundamental vs. Technical Analysis

Other investment analysis methods include fundamental analysis and technical analysis.

The fundamental analyst stresses the financial health of companies as well as the broader economic outlook. Practitioners of fundamental analysis seek stocks they believe the market has mispriced. That is, they are trading at a price lower than is warranted by their intrinsic value.

Often using bottom-up analysis, these investors will evaluate a company's financial soundness, future business prospects, and dividend potential to determine whether it will make a satisfactory investment. Proponents of this style include Warren Buffett and his mentor, Benjamin Graham.

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