Fundamentals Matter, but So Does Price: How to Combine Both for Better Investing Decisions

Should you buy a stock because it’s fundamentally strong, or because its price is moving higher?

It’s one of the oldest debates in investing. Some investors focus almost entirely on fundamentals—metrics like revenue growth, earnings, and valuation ratios. Others rely more on price action, studying how a stock behaves relative to the market.

In reality, both matter. When fundamentals and price align, investors have a stronger case for entering (or exiting) a position. Let’s explore how combining these two factors can help build a more consistent and effective investment strategy.

Why Fundamentals Still Matter

Fundamentals are the foundation of investing. They measure the health of a business and provide insight into its long-term potential. Key factors include:

Earnings growth – Is the company consistently increasing profits?
Revenue trends – Is demand for its products or services expanding?
Valuation ratios – Metrics like P/E (price-to-earnings) and P/S (price-to-sales) help gauge whether a stock looks expensive or cheap compared to peers.

Strong fundamentals often signal quality businesses that can weather downturns and compound returns over time. Legendary investors like Warren Buffett have built fortunes by emphasizing fundamentals.

The Challenge with Valuation

However, valuation is tricky. Forecasting future cash flows with precision is almost impossible. Companies face unexpected changes—new competitors, economic slowdowns, regulatory shifts—that can alter earnings dramatically.

This unpredictability often leads to volatility in stock prices. A stock may look cheap on paper, but if investors lose confidence, its price can still fall further.

Why Price Action Matters

While fundamentals tell us about the company, price tells us how the market feels about it.

One of the most useful tools is relative strength. This measures how a stock performs compared to the overall market (or its sector).

If a stock is outperforming the market, it suggests strong demand and investor conviction.
If it is lagging, it may indicate doubts about its value or prospects.

In practice, when investors believe a company is overvalued, the price often stalls or declines. Conversely, when they see potential, the stock tends to climb faster than the market.

Why Using Only One Factor Can Be Risky

If You Rely Only on Fundamentals

A stock may look undervalued using traditional metrics, but if there’s no investor demand—or if there are hidden risks—its price can remain low (or fall further).

If You Rely Only on Price

Chasing stocks just because they are rising can also lead to mistakes. Short-term moves are not always tied to business performance and can reverse suddenly.

This is why combining both fundamentals and price signals offers a more balanced and reliable approach.

The Power of Combining Fundamentals and Price

From my two decades of market experience, I’ve found that the highest-probability trades come when:

The company is fundamentally strong. Earnings, revenue, and industry trends all point upward.
Relative strength confirms demand. The stock is outperforming peers and indexes, showing investors agree with the growth story.

This dual confirmation improves the odds that a stock will deliver sustained gains rather than short-lived spikes.

Why Portfolio Size Matters

It’s worth noting that strategy often depends on the size of your portfolio:

For smaller portfolios (under $50 million), combining fundamentals with relative strength works especially well. Investors can move in and out of positions more easily, without worrying about liquidity.
For very large funds, entering or exiting positions becomes more complex. Here, valuation often takes center stage because price movements can be influenced by the sheer size of trades.

For most individual investors, however, a blended approach works best. Fundamentals point you toward quality companies, while price action helps with timing.

Putting It All Together

The goal isn’t to win every entry—it’s to stay invested with defined risk while the trend does the heavy lifting. My process combines three simple pieces: scale in, protect the downside, and maintain the hedge as prices move.

Start with a written plan for fresh capital. Split it into tranches (for example, 3–5 slices). Deploy the first tranche when your setup appears, pair it with a protective put, and note your next trigger—either a small pullback, a time-based checkpoint, or a modest gain that confirms trend strength.

As positions work, roll the hedge up and out on a set cadence—say every 30–45 days. If the portfolio is up 10–15%, close the old put and buy a new one closer to current levels.

Keep costs predictable. Cap quarterly hedge spend at a small percentage of portfolio value so the insurance never eats your compounding. When implied volatility is low, shorter-dated puts are usually cheaper; when it’s high, consider fewer, longer-dated contracts to spread cost. Track these choices in a simple journal so you can refine over time.

Here’s the whole play in a checklist you can reuse:

Allocate in tranches with preset triggers (price, time, or progress).
Pair entries with protection sized to your portfolio, not your hopes.
Review and roll hedges on a fixed schedule, not a feeling.
Budget the premium so protection remains sustainable.
Record outcomes and tweak only what the data justifies.

This approach won’t eliminate losses or FOMO, but it shrinks the consequences of being early and keeps you from waiting forever for a perfect pullback that may never come. You’re choosing consistency over clairvoyance.

Over many cycles, that’s what keeps you invested, sleeping better, and compounding when others are stuck on the sidelines.

Final Thoughts

Fundamentals matter. Price matters. But it’s the combination of the two that gives investors the strongest edge.

By identifying companies with solid fundamentals and confirming that the market agrees through relative strength, you increase the odds of success.

So let me ask you:
Do you rely more on valuation metrics when buying stocks, or do you use price action to guide your decisions?

Disclaimer: This article is for informational and educational purposes only. It does not constitute financial, investment, or legal advice, and should not be taken as a recommendation to buy, sell, or hold any asset. Always conduct your own research and consult with a qualified professional before making any financial decisions. The author and publisher are not responsible for any actions taken based on the information provided in this content.