Let's begin with a discussion of some key terms and methods of analysis when dealing with financial markets. Though there are countless financial instruments, including stocks, bonds, ETFs, currencies, and swaps, we'll limit our discussion to stocks and the stock market. A stock is simply a fractional share of ownership in a public company. The price of a stock is expected to increase when future prospects for the company rise, and decrease as these prospects decline.

There are generally two camps that investors fall into. The first are the fundamental analysts. These analysts pore through company financials looking for information that indicates that, somehow, the market is undervaluing the shares of the company. These investors look at various factors, such as revenue, earnings, and cash flow, and various ratios of the values. This frequently involves looking at how one company's financials compare to another's.

The second camp of investors is the technical analysts. Technical analysts believe that share prices already reflect all publicly available information and that looking through the fundamentals is largely a waste of time. They believe that by looking at historical prices—stock charts—you can see areas where prices are likely to rise, fall, or stagnate. Generally, they feel that these charts reveal clues to investor psychology.

What both groups have in common is an underlying belief that the right analysis can lead to profits. But is that true?