Questions for the Fundamental Analysis gurus

Discussion in 'Trading' started by chiefraven, Oct 14, 2006.

  1. Was wondering if anyone could give me some directions as to how to get better at doing fundamental analysis: examining income statement, balance sheet... etc for the purpose of finding out if a company is going to bust or whether it really does have a good and sound foundation and future like its earning report says.

    'cuz i know just reading the earnign reports often time doesn't tell the real truth behind what's really going on behind the company 'cuz sometimes they only tell the positives and hide the negatives.

    Can anyone maybe give me a few tips or a rundown on how you go about doing your fundamental analysis? especially for stocks with earning report out.

    A great example would be RIMM (research in motion)
     
  2. Bernstein's [NO! NOT Jake] Analysis of Financial Statements is probably the best book with Fridson's Analysis of Financial Statements easier. Shim and Siegel also wrote a good book that may be out of print. Others I have but have not read much are Schilit, Financial Shenanigans and O'Glove, quality of earnings. The basics are quite simple - you are looking for things that are out of line with each other e.g disjoint between sales growth and net income growth. Accept it is a craft and as such will take many years and many teachers, hence my not bothering to list examples here, as much as because I have got rusty with it.

    There is acually a surprising amount of information given in US FASB statements AND THE FOOTNOTES (hint) for those who know what to look for, but it won't generally be highlighted in the Chairman's statement*. Nowadays I rarely bother.


    *sometimes something negative is mentioned here as if it were a positive.

    Disclosure: Not a guru.
     
  3. timmyz

    timmyz

    fundamental analysis is more for investing than trading.

    you need to take at least one accounting class before you'll understand what's going on with financial statements, how they relate to each other, and how to go about investigating certain items. earnings is not what you think it is.

    there is a lot of information given in 10Ks and 10Qs but you will not find anything that's so obvious that nobody else knows about it. of all the companies that went belly up or turned out to be frauds, how many auditors discovered them beforehand by looking at financial statements? 0.
     
  4. gbos

    gbos

  5. timmyz

    timmyz

    this is impossible. this book is for people who believe what they want to believe. in the system development world this book is similar to "system development without doing work and easy as 1+2+3" type of books. when you analyze real financial statements instead of the examples used in books and then connect the financial statements to a valuation you will see that things are different


    "...designed to help anyone who works with financial reports--but has neither the time nor the need for an in-depth knowledge of accounting--cut through the maze of accounting information to find out what those numbers really mean."

     
  6. gbos

    gbos

    When a quantity has a value of 1000 and a confidence interval of plus minus 200, using two decimal digits in your calculations instead of adding integers will not help you much. This applies to fundamental analysis when a private investor has access only to publicly known data.

    This book is a very good starting step for an investor explaining how to read a company's financial statements and how to spot allarming signs but of course it will not give you any winning system. There are other books talking about fundamental-based picking strategies out there, from simple two factor strategies like the "little book" of Joel Greenblatt to very complicated ones. But imho complicated is seldom better in stock picking and overconfidence in the data can hurt a lot. If we could put our own accountants to double check the entries in the books of a company of course we could be more precise.

    I didn¢t understand what you mean by saying this is impossible. Are you referring to stock picking? Stock picking is possible, not all the times of course. There are instances where market psychology drives prices up and instances that psychology drives prices down. Prices are more volatile than fundamentals.

    Regards
     
  7. timmyz

    timmyz

    you cannot "cut through the maze of accounting and find out what those numbers really mean" without knowing how financial accounting works.

    but even if you do know how financial accounting works and you do know what's going on, you're still not going to find anything so obvious that nobody else knows about it.

    and it's not about pennies and nickels to get everything to balance. it's about understanding that certain numbers don't mean what you think it means, and therefore ratios based on that number don't tell you what it should tell you. it's about recalculating certain items to get an approximate of the number that you do want. the books always use examples that conveniently fits the point they're trying to make. when you have to look at financial statements from different companies you will see that things don't always fit so nicely.