Fundamental Analysis – Expensive and Futile

New York Stock Exchange

Fundamental analysis of stock market investments is a futile and expensive waste of time and should be wholly replaced by quantitative analysis.

Active fund managers employ both fundamental analysis and the equally useless pseudo science of technical analysis to attempt to pick stocks which will outperform the general market.

Trading floor of New York Stock Exchange
Trading floor of New York Stock Exchange – By Kevin Hutchinson – Flickr, CC BY 2.0,

 

The quantitative approach is most successfully instantiated in the indexing of investments to track a given stock index. This approach recognises that forecasting the fortunes of individual corporations and stock prices is best replaced by investing in the market as a whole.  My preferred stock index of choice is something akin to the MSCI World, since I believe in maximum global diversification to avoid the fallacy of predicting which economy will grow and which won’t.

A fundamental analyst takes a company’s accounting records and statistics for the industry in which the relevant entity operates. He then extrapolates future growth based on past performance. It is nothing more than guesswork.

New York Stock Exchange
New York Stock Exchange By The Web President – This image was originally posted to Flickr as nyse, CC BY-SA 2.0

There are uses for fundamental analysis but not in investing.  Vile asset strippers need to comb through a company’s accounts to find out whether its net assets are worth more than its stock market valuation. Industries and sectors need to be categorised by analysis to enable inclusion in a stock index.  Mergers and acquisition teams (pariahs and scum that they are) need to analyse a company to see whether it makes a suitable target for their aggressive and unpleasant predator client.

But for the investor, it is best to rely on price and quantitative analysis since it has been demonstrated beyond any shadow of doubt that there is no persistence of performance among “active” asset managers.  Over time it is simply a lottery – today’s outperformers become tomorrow’s laggards with monotonous predictability. It is akin to a physical law of nature.

So here is a better way: Profitable Stock Market Investment is Very Simple

If you feel you need to read about investing then stick to people like John Bogle the founder of Vanguard one of the world’s largest groups of index tracking equity funds.

If however you would really like to get to grips with the subject all you need to do is to study the index methodologies of the leading index providers such as MSCI and S&P. If you really want to dig deep and are a geek then this is undoubtedly your best bet:

MSCI Global Investable Market Indices Methodology March 2018

S&P US Indices Methodology

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.