Fundamental Analysis – Blinded By The Financial Facts
Back in the day when relatively few non-professionals even thought about investing in corporate stocks and bonds, a focus on company financial statements was the gospel of conservative (meaning safer) investment theology.
Investment gurus studied Profit and Loss Statements, Balance Sheets, and endless footnotes to determine which businesses were most likely to continue to grow, prosper, increase their dividends, etc. Then, they assessed the quality of “management” before forming conclusions about the economic viability of the enterprise.
The quality of the numbers being analyzed was audited by well respected financial analysts while scores of research MBAs from throughout academia studied business and economic trends within company relevant markets. Sectors of businesses were also put under a fundamental microscope to further fine tune future stock market trends and performance expectations.
“Top-down” or “bottom(s)-up”, fundamentally sound companies were identified, classified, categorized, and fantasized over in much the same way as was being done by the very technicians that the fundamentalists laugh about at cocktail parties.
Certainly, it was presumed, the most financially sound companies would be the most resilient in the face of whatever surprises the economy, global politics, and the weather had to offer. Companies that had “grown up” profitably would have what it takes to continue in the right direction.
Clearly, both schools of financial thought have generated libraries full of useful (and questionable) information that marauding bands of Wall Street product advertising agencies can use against one another in their glossies.
Neither approach should be totally ignored; neither approach should be totally accepted; and neither approach has what it takes to do what its advocates want you to believe it can do — predict what’s going to happen next.
More recently, the analytical elite have reinvented themselves with fundamental analytics sub-divided by capitalization levels, sectors, countries, hemispheres, and more. The supply of data is endless — so much so we are expected to believe, that only very special Wall Street affiliated super computers can make enough sense of it all to really “know” which stocks are worthy of investment.
Frankly, I think they have all traveled way off course in their pursuit of some fundamental nirvana, pretty much to the same extent as their friends in the technical arena. No matter how long the train of growing profits, or how strong the balance sheet, every business has to adjust its model to outside influences to survive long term — and so does every investment plan.
There are a few fundamental fundamentals that demand as much serious attention as the fundamental technicals mentioned above, starting with long term profitability and current financial ratios. (If you haven’t looked at both, you are a speculator, not an investor — no buts, end of discussion.)
Dividend payout history provides information (indirectly) about the quality of a company’s management, products, business model, financial acumen, profitability, and respect for its shareholders. Don’t believe the growth company baloney; if they are not paying you a dividend, they are absolutely overpaying your senior employees.
If you are thinking: “what about start-ups, IPOs, emerging markets, commodities, etc.”, don’t. Those are speculations, not investments. This is not a judgment that all speculations are bad — it’s simply a warning that you must sift through the euphemistic descriptions and figure out what kind of bets you are being asked to place.
Profitability, current assets vs. current liabilities, market share, product mix, and regulatory environment are other key fundamentals that are fairly easy to get your head around — and pay particular attention to the latter.
Very few politicians act as if they know anything about business, capitalism, markets, etc. Very few theoreticians (particularly research economists) seem to know anything about actually running anything for real: business, government, investment portfolio, whatever.
And this brings us to MPT — the fancy new scourge of the financial markets.