Fundamental analysis, according to TradeKing, is:
Fundamental analysis is the foundation of solid investing. It helps you determine the underlying health of a company by examining the business’ core numbers: its income statements, its earnings releases, its balance sheet, and other indicators of economic health.
Solid investing…that sounds yummy…
While many of the wealthiest investors swear by fundamental analysis like the great Warren Buffet or Benjamin Graham…
We certainly do not.
What is Fundamental Analysis Really
This post in going to be a little bit shorter than most.
But in short…
We feel like fundamental analysis is dead, done, and very unlikely to be a sound strategy in the future.
But why you ask? After all, you went to college, and if you studied finance, they told you this was the way to go…
They had you read balance sheets…
Read case studies…
Put valuations on companies based off of earnings projects and free cash flow…
And all of it worked, in theory right? You got an “A” on your final so fundamental analysis is for sure the way to go!
And if you are an individual investor, you have read Yahoo Finance, right?
Read balance sheets…
Heard all of the analysts talk about future earnings, same-store sales, and the effects the dollar will have on certain sectors…
Right? We have done all of this before right?
This is what investing with fundamental is all about:
- Getting all the numbers (earnings per share, revenue, profits, stock buybacks, dividend, expenses, EBITDA, CAPEX, income statements, balance sheets)
- Reading the quarterly earnings statements
- Making a prediction on those future fundamentals then assigning a value to them
What We Think of Fundamental Analysis
We see two major flaws with fundamental analysis:
- Where the hell do you even get all of that information?
- What the hell does any of that even mean?
The difference between those who can access certain information and those who cannot on Wall Street is about the difference between Kobe Bryant and Mini Me playing 1 on 1 basketball. It’s ridiculous and completely one sided.
With this in mind, we can get very close to throwing in the towel on our former friend Mr. Fundamental Analysis.
But we just have to do one more thing first…
We have to ask the obvious question…
Where are the fundamentals in this…?
That is correct…they are nowhere to be found.
If Fundamental’s Don’t Work What Do I Do?
Well, actually it is quite simple…
If you think a stock can go higher, for whatever reason (you think the logo is cute, it has sold off, your kids use the product, my horoscope said to buy it, I got a tip, etc)…
Wait for it to sell off at least 5%.
After you purchase the stock (because it will go down 5% at some point), be happy!
After is has run up no more than 5-10%, sell it.
This will do two simple things that you are currently not doing:
- Get you engaged in the market
- Allow you to buy at a better price than you normally would have
Seems simpler to me!
Join me in saying bye bye to fundamental analysis and hello to common sense analysis 🙂
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