Fundamental Analysis

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fox_terrier

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Post Number: 257
Registered: 10-2003

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Sunday, October 10, 2004 - 09:21 am:

Hi Guys,

Below is an interesting excerpt from Van Tharp's newsletter.

Trading Tip

Of Housing Bubbles and Fundamental Analysis

by D. R. Barton, Jr.

"Money won't buy happiness, but it will pay the salaries of a large research staff to study the problem." -- Bill Vaughan

It's absolutely 100 percent right. That's the beauty of fundamental analysis. It allows people to be 100 percent right. It doesn't matter if the analysis that led to the conclusion was of world-class quality or just an observation or gut feeling; you still have a great chance to be right about your analysis. That's because any stock or commodity you evaluate will breathe it will go up and down and up and down on the way to wherever its going. And along the way, the folks who thought it was going up were right (at some point in time) and the folks who thought it was going down were right also (at some point in time).

There is a tongue-in-cheek axiom about prediction in the stock analyst world that says never give price and time at the same time.If you give an estimate of price at a given time, you have a very good chance of being wrong. On the flip side of the coin is the general fundamental analysis that gives a direction but no time frame. Used in a vacuum, this type of directional prognostication can produce a slow death, metaphorically speaking.

Let me say right here, that I am not against fundamental analysis. I use it. Many of the top traders and investors that I know use it. But I see many, many people misusing fundamental analysis and getting punished by the markets while doing so. When people don't honor their stop losses, they usually do so because they don't want to admit that they're wrong. And almost without exception, the people that are the most tenacious about sticking with bad trades are those who got into the position based on fundamental analysis. It's much easier to get married to a position if you believe the story about the stock. So how can we constructively use fundamental analysis? Here are a few guidelines:

· Good, (even great) fundamental analysis does not give us a license to forget about risk control. I've read articles from people who make recommendations on fundamentals (especially value type investments) that say the fundamentals take care of risk control and not to use stop losses. This is the same as saying that your stop loss is essentially zero or 100 percent of your investment. Understand YOUR approach to using such a recommendation. Are you willing to let the stock drop 50 percent? 80 percent? Go all the way to zero? If you have one of these personal levels of pain tolerance, then incorporate that into position sizing strategy. Be prepared for some level of worst-case drop no matter how good the research is.

· Don't get married to your position. Too many people, especially fundamental analysts tie their credibility, or their personal self-value to the rightness of their picks. Divorce your emotions from your analysis. Do the research. But understand that the market may not agree with your analysis for a long time! Determine what could change that makes you change your opinion of the selections. And remember that there is almost certainly someone who believes the opposite of what your research show. For example, two well-respected people have different takes on the residential real estate market right now. Peter Thiel of Clarium Capital, is very bearish and sees crashing prices due to the unsustainably high price levels and heavy consumer debt loads. Steve Sjuggerud believes that there is plenty of upside left in this market and is taking a contrarian view versus the gloom and doomers. Who is right? Eventually they both will be! But Steve's time frame is relatively short compared to Thiel's; which leads to our last point.

· Understand the time frame that is required for your fundamental analysis to bear fruit. Some analysis is good for only the next earnings quarter. Turnarounds may take a year or more. Analysis of a start-up may require two, three or more years to come to fruition. Base your risk control and trade review cycle on the length of time required for the fundamentals to overcome the normal peaks and troughs of the broader market.

Use fundamental analysis in a way that doesn't blind you to risk control, changing market conditions or other outside influences that can derail even the best research. Stay loyal to your money instead of your ideas and your fundamental analysis will be a useful tool in your trading and investing plan.

Cheers
FT

noelle

Member

Post Number: 8
Registered: 10-2003

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Votes: 0


Monday, October 11, 2004 - 03:23 am:

Fundamentals is the ground bases of the stock market.
Prices move because institutions, not individual traders,
buy and sell stocks. Most institutions use fundamental
analysis in their decisions so it's only positive if a
trader check the earnings report and do some research before
committing to a trade. It's drawback of course is that it
takes time and hard work to research and find the right
stocks. But then who says that the stock market is an easy
place to earn money. I know there is a lot of talk in this
forum how easy it is to win in the stock market by just
committing 1 hour a week looking at charts. My god, these
traders must be the chosen ones. Anyway it's their money.
If they believe they don't have to work hard in the stock
market to win then good luck.

There's a piece about price and time. I reckon the writer
had never traded using time patterns because he was very
negative about it. Or perhaps he tried but was very
unsuccessful.

Time patterns, in conjunction with price and volume patterns
is one of the greatest tools a trader could have. Used the
right way, this tool gives the greatest return at the
shortest possible time. Only inside information could beat
this one. These patterns are rare and take months or years
to develope but when it happens then be prepared to take
the trade because prices will move very fast.

Noelle

-----------------------------------------------------------

"Time is the most important." W. D. Gann

"For years I had been the victim of an unfortunate
combination of inexperience, youth and insufficient capital.
But now I felt the elation of a discoverer. My new attitude
toward the game explained my repeated failures to make big
money in New York. But now with adequate resources,
experience and confidence, I was such in a hurry to try the
new key that I did not notice that there was another lock on
the door--a TIME LOCK!" Reminiscences of a stock operator