Easy Fundamental Analysis Part 2

This video is about taking the fluff out of fundamental analysis and making it accessible. The speaker stresses that the simplified form of fundamental analysis can make be a huge difference in your investing success. If you can't view the trading video above, you can watch it here.

There are questions to be answered when doing fundamental analysis, simplified or otherwise. The speaker names the following:

Fundamental analysis uses extremes. Stocks that are at their highs can be filtered out from the rest as a result of using an extremely strict fundamental analysis criteria. Using this same stringent rules can lead the analysis to lose relevance. The speaker gives the following example: Pulling up a bunch of stocks that are at their52-week high over the past 12 months show that the stocks are likely to decline from those highs.

Extremes can be problematic when projecting future price growths as they can lose relevance as indicators on what the company's future really looks like. For an accurate interpretation, questions like what is causing the highs and how long the stocks have had these highs should be asked.

Traders will oftentimes pile indicators. Assume a certain probability that a a good trade is going to happen based on a certain criteria. What fundamental and technical analysts do is to add another indicator that will 'increase' this probability.

Let's say, there's a 25 percent chance for stock MRU to rise based on P/E ratio. Add another indicator or two with a 25-30 percent chance of being accurate, and the total projection starts to look promising. But stocks do not have a normal probability distribution, otherwise investing would be a no-brainer.

This means that projections made by adding multiple indicators together can be misleading. More indicators does not equate to a higher chance of success. Indicators are independent of one another.

Absence of context. A variable standing alone and measured against itself is irrelevant. Market conditions and the particular industry or sector influence stocks. The speaker cites one pitfall into which traders fall: comparing stocks from across industry groups. For example, consumer electronics and commodities companies are managed differently and produce value in different ways that they are almost impossible to compare.

Semi-efficient marketplace. The speaker says that a semi-efficient marketplace assumes that most information about a stock is widely known, so this information is already priced into the value of the stock. When traders pitch a score or criteria as “predictive”, what they are really getting are today's scores already valued into the stock.

Investors are speculating on future earnings and growth, not investing on past events. Although this means that variables have no 'predictive' value, fundamental analysis still allows traders for a much faster and reliable understanding of specific things about the market.

Fundamental Analysis Part 2 Quotes

Simplified fundamental analysis can make a big difference in your investing success; however, it is much more accessible than traders will often times assume from the information that's out there.

Do not make the mistake of thinking that I can pile indicators on top of each other and the more fundamentals I look at, that's going to increase my chance of success. It Won't.

No context really yields a measure of the stock against itself, which ultimately has no meaning.

Because investors as a group are not "rational", the market is only semi-efficient.

Submitted by YouTube Trader on Thu, 07/21/2011 - 23:56

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