Fundamental Analysis - Why it's not for me
Ok... I get it... we have a controversial headline to this blog post and I'm about to get a few emails telling me why I'm the biggest idiot on the planet (normally I wouldn't disagree)..
but REALLY.. what IS Fundamental Analysis? What place does it have? This blog post is going to attempt to answer the question (or at least give my views on it)
Should Fundamental Analysis be your sole criteria for taking a buy / sell position in the market?
When we look at Fundamental Analysis, it is quite easy to get caught a little off guard.. What's the profit /loss of Stock ABC?... What do you think of the current Economic environment in Africa and how does this relate to the Gold price? Iranian Sanctions... what do you think will happen to Oil and the price in which it trades? These are all valid questions, but ..... really.... who cares? honestly.... who ACTUALLY cares?
The problem with Trading the Financial Markets is the relationship the media have with the outcome (if you haven't read my previous post - THIS SHOULD SHOW WHAT I MEAN - and when we look at the desired outcome of the media - it really isn't tough to understand that there are agendas at play, and quite honestly - trading doesn't need to be made more difficult than it is - this is where Fundamental Analysis falls apart (in my opinion).
The age old question - does the price follow Fundamentals? or do the Fundamentals follow price? Chicken and egg right?
Let's answer this question once and for all.... (or at the very least explore it)
Fundamental Analysis is really just the concept of understanding whether a position in the market is currently over/under valued.. someone who has a fundamental mindset is someone who thinks the Profit / Loss of a company has the only baring on the share price and the typical fundamental analyst will often try to figure out all manner of Financial dynamics to justify a share price, and once this calculation is determined (which in my opinion is nearly impossible to do) - they will then decide to either take a buy / sell position in the market on the back of these complex calculations... yes I get it... we have hedge funds with Fundamental Analysts and we have all the Investment Banks jumping over themselves to hire the next Harvard graduate who can make them money using a Fundamental mindset... but this is why these institutions return relatively small amounts per annum... yup... I just hinted that Fundamental Analysis is why the biggest Financial Institutions on the planet generally DON'T deliver.
One of my idols in the Investing world is Mr Ray Dalio, for those of you that don't know - he is the founder of Bridgewater Associates - the biggest Hedge Fund in the world, and he has an outlook that is based largely upon economics (Fundamentals) - this is understandable.. he runs a $160 Billion fund ... they simply cannot allocate all of their funds to a Technical mindset... because if shit hits the fan.. it's not like they can dump a 5% position overnight to protect capital... there has to be buyers in place.... so it makes sense why Bridgewater adopt a Fundamental mindset (hoovering up dividends in the process) but to the other side of that... why is it that the biggest Hedge fund in the world can only give annual returns of 10-40% (which is still incredible by the way) and the humble retail trader who executes a Trend based strategy on a much smaller scale can generate returns MASSIVELY in excess of this? (especially when incorporating leverage into the strategy)
The humble retail trader (you and I) are at a massive advantage - if we need to dump a position - we can do it in a minute... if Ray Dalio or Warren Buffett need to dump a position - it's done by algorithm based trading and it'll be done over a period of a few weeks - these funds are bound by regulations that basically say they can't dump a position overnight that'll destroy a given stock (or the overall market for the matter) -so if a stock moves against them... they're screwed and they have to "hedge" the position (take a position on the opposite side of the trade from their original hypothesis).. and whilst it helps the hedge fund... by not being able to cut losses and having to "hedge" - it means that the returns are massively reduced.
Having a largely Technical mindset is advantageous for a number of reasons... but if there is 1 rather large piece of advice that I can impart on the world - it's this...
PRICE pays... this may seem fairly obvious to those of you that are maybe reading this blog for the 1st time and also for those of you that have the correct application to the markets, but to those that are perhaps quite new to the markets (I know there's a lot of you in my email list)... I'm still amazed at the number of emails that I get asking me what I think about abc stock and the valuation it is giving... I simply don't care... the reason I don't care is because if price is going up.. I'll be a buyer... if price is going down I'll be a seller - it's really not rocket science... i prefer to have the mindset that I'll make money if price IS performing rather than have the mindset that I'll take a position if the company balance sheet looks attractive AND i think price will perform - there's a very distinct difference.
To go back to my original question - should Fundamental Analysis be your sole criteria for making an entry into the market?
My own response is no... it most definitely shouldn't... and the reason for this is simple...
We are (you and I) essentially small retail traders and the REAL question we should be asking ourselves is - do you want to make money? or do you want to be right?
If we look at the recent pissing contest between Carl Ichan and Bill Ackman (2 of the biggest Money Managers on the planet) - they were locked in a very high profile jousting match on their views on Herbal Life... if you're not familiar with the story - HERE IT IS
The lesson we can take from this - Mr Ackman was sooooo fixated on being correct that his rational thought all but disappeared into the wind, and he continued to watch the advancing Herbal Life price move against him.... his Fundamental Analysis cost him an obscene amount of money and he failed to acknowledge that even if he thought he was correct, why would you hold a position in a stock.. where quite clearly PRICE is not demonstrating the required behavior? This is the lesson.... it is far better to pick a side with Price.... rather than the balance sheet.
Does Fundamental Analysis have a place? Yeah it does... but to a Trend Trader - a VERY minimal amount.... if you ask me my thoughts around Earnings Season - you'll know that I'm looking for stocks that out-perform but still get slaughtered by Wall Street... and if you follow me closely on Social Media or in my community, you'll know that I have called an obscene number of stocks and I have knack for picking up these discounts at the correct moment.
In a kind of round about way - we can see that Technical Trading is far more of a productive mindset for the humble retail trader, and if we can combine very limited applications from the Fundamental side of the tracks... it makes for a far more profitable time on Wall Street.
Trading doesn't need to suck balls.
If you’re interested in education and you struggle with your trading results… we’d love to hear from you.