Fundamental analysis creates what I call a “reality gap” between “what should be” and “what is.” The reality gap makes it extremely difficult to make anything but very long-term predictions that can be difficult to exploit, even if they are correct. - Mark Douglas
And even those may be amiss. I used to do incredibly thorough analysis of equities. Some of them just make up numbers from thin air, and there's absolutely no way to determine that before you're in. I stopped trading equities about 15 years ago.
"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." " The market can remain irrational longer than you can stay solvent" Sometimes when price is going in the direction of the fundamentals, it's like , wow, see, fundamentals really do work and is pushing price in the right direction. Then when price is going against the fundamentals direction , it's like, wow , see, all these people that followed the fundy's were wrong , forced out, and sending price the other way I like to *try to know the fundamentals of the situation and usually try to go with them and use technicals of price to guide my entry , but be willing to throw in the towel if price doesn't do what I expect. I use a price for the exit decision too. Not some fundamental factor that I will find out after the insiders. The insiders or someone else will usually know important fundamental factors before you. Then the insider actions will usually put footprints on the price. For the SEPT FOMC meeting, a big trader was saying, "even if I know the decision before hand , I don't think I know how price would react." So there is that aspect of the discussion as well.
Another thing that makes FA iffy is that if a stock is overvalued, only the fact that it is overvalued might make the company more successful, and thus more valuable in the future, than it would have been if it's stock would not have been overvalued.
In the late 70s I spend hours checking Fundamentals and part of the 80s were good as well, I was doing so well trading stocks I decided to go to school and get degree and majored in Accounting. Well, mid 80s is when companies started feeding lies in their accounting, CEOs started to make insane money and always based on stock price instead of on real earnings. By the 90s it seemed no one was posting real numbers and even if you got 75% of numbers true, they would always say we are making changes in the past. I should have gotten degree in Chemistry to make better plants in garden, cause I never look at the numbers any more.
Exactly; the markets are part art, part science . ...it takes a skillful trader to realize and understand and implement this successfully. That's why trading solely one way, or relying on a system or indicators...is kind of a flawed model. -- it doesn't take into account a vital factor: the human element.
Same problem for a majority of fundamentalists : timing. Of course, they will be right. One day. But being right 1 year, 1 month or sometimes even 1 day too early and you can go broke fast. Except if you already got some billion in your bank account, and you will wait or average down. But everybody is not Jim Rogers, Soros or Faber. In order to maximize your survival rate, you better develop another edge (market action, psychology, contrarian view, charting, money management etc). CM
Mark did not get FA at all first of all FA never says what should be, actually neither is TA both type of analyses says what it is now: TA talking about prices, FA - about values... FA is not for traders (who speculate on price), its is for investors (who speculate on value) the major flaw of FA comparing to TA is that for TA price (and its history) is known and available to every one, while for FA value is not known, it is derived from many facts some of which(some times most of witch) are not publicly known to everyone, or not know to everyone at the same time.
"Stocks don’t go up because companies do well or do poorly. Stocks go up and down depending on supply and demand. If a stock is marketed well enough to create more demand from buyers than there are sellers, the stock will go up. What about fundamentals? Fundamentals is a word invented by sellers to find buyers. Price/earnings ratios, price/sales, the present value of future cash flows, pick one. Fundamentals are merely metrics created to help stockbrokers sell stocks, and to give the buyers reassurance when buying stocks. Even the way profits are calculated is manipulated to give confidence to buyers."--- Mark Cuban