Fundamental Analysis Is Fundamentally Flawed

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Fundamental Analysis and why we don’t focus on it 

We have answered this question many times in the past, but there are two reasons.  The rampant abuse of share buyback programs that can magically alter the EPS of a company renders this metric obsolete. Secondly, even when this type of manipulation was not as endemic as it is today, the data is provided in a standard format, and anyone that examines this data can draw the same conclusion.

Our primary focus is on the psychological state of the crowd. While we use Technical tools, they play a secondary role, and over the past 17 years we have found that technical analysis is far superior to Fundamental analysis if employed correctly; most experts abuse Technical analysis by seeing things that are there or trying to force the pattern to match their bias.  We use Technical analysis to fine-tune entry points for a given stock, but our main weapon of choice is Mass Psychology.

Fundamental Analysis In The Forever QE Era 

Finally, in the forever QE era relying on fundamentals is tantamount to giving the Fox the keys to the hen house and asking him to be a good boy. Logically speaking value-based stocks should be a good investment, but as money is cheap (low-interest rates) and greed knows no limits, the big players are borrowing large amounts of money on the cheap and throwing it at stocks that they think will offer the best return.  This trend shows no sign of abating, so we are not going to bet against it.  In this environment, value-based stocks will continue to take a drubbing as the focus is on momentum-based stocks. Instead of chasing momentum stocks which take off fast and then pull back even faster, we focus on stocks that are about to breakout. The idea is to get in before the stock takes off and not after.

One day value-based investing will make a comeback, but who knows when that day will dawn. It is far better to play the hand that one has been dealt, then pray and hope for a better hand, that might never see the light of day.  Hence the saying, the trend is your friend, but if you try to bend it, it will turn from friend to foe.  What we have said in the past continues to hold, value investor’s and by default, those relying on fundamentals are going to be on the receiving end until this bull drops dead. There is a saying that in the land of the blind, the one-eyed man is king. Well, in the land of forever QE, the trend player rules.

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