Flaw in Fundamental Analysis

man4urheart

Well-known member
#1
HP just reported a loss of 8 billion due to mis representation of financial statements by Autonomy Corp which HP agreed to buy.

Hewlett-Packard Profit Forecast; $8.8 Billion Charge - Bloomberg

We also saw Deccan Chronicle do that. We also saw Satyam Do it. Enron do it.

List will get long!

Doesn't that conclude that fundamental analysis has biggest flaw, that it is on mercy of management of company! They can really report what they want idiots like us to read and invest!

Further to add, you cannot analyze commodities on basis of fundamental analysis.

Nor can you form a view on Forex! :biggrin:

So don't get too excited from Warren Buffet!

I once was reading a magazine "Futures" , the guy in interview was talking all about his technique about fundamental supply chain for grains. Guess what!

He forgot to hide the print out of Elliott Wave Theorist lying on his desk which came in the picture taken for page of magazine!

What I want to highlight is that I have even started to doubt in media what is known of Warren Buffet being fundamental analysis king! may be behind the scene he might be using 200 MA on his charts!:laugh:

I already see prudent investor worried about Opto Circuit which is right candidate for addition in fraud list! My charts are pointing to plunge ahead!
 
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#2
Doesn't that conclude that fundamenatal analysis has bigest flaw, that it is on mercy of management of company! They can really report what they want idiots like us to read and invest!

I already see prudent investor worrried about Opto Circuit which is right candidate for addition in fraud list! My charts are pointing to plunge ahead!
So true!

While I don't agree with your views on Warren Buffet, at the time in which he operated mostly, corporate fraud was in its primitive days. And anyways corporate governance disclosures and standards are way better in US than in India.

At the end of the day, there are different ways to make money in the market. While I essentially support the fundamental analysis view, I have no bias/opposition against the technical loyalists. One should diligently stick to and follow what works for them.

Having lost a lot of money in Indian markets - for corporate frauds and misdemeanors - in stocks like Welspun Corp, Everonn Edu, Deccan Chronicle, LIC Housing Finance, Cranes Software, I feel all fundamental analysis is meaningless until you have fair level of confidence on Management Pedigree.

The true reason for diversification is to protect you against this kind of negative black swans. One must not put all eggs in one basket no matter how lucrative the opportunity looks like.

Regarding Opto, I am worried not because of management pedigree or their propensity to perpetuate major fraud; I am worried because they are deep down a vicious cycle of messy working capital flow where it seems there are no easy ways out. And the options are closing in by the day.

However, the business can still survive, may be after some haircuts and distressed asset sales, de-leveraging balance sheets and similar exercises. I am determined not to throw good money after bad money this time round.

The base case for firms in med tech industry has been good. But whether the management can steer the boat to a safe harbor this time round remains to be seen.
 
#3
While I don't agree with your views on Warren Buffet, at the time in which he operated mostly, corporate fraud was in its primitive days.

Not really true. For all practical purposes Benjamin Graham was the first person to formalize fundamental analysis. He was Warren Buffett's teacher. If you read writings by Benjamin Graham (in the 1920s, 1930s etc) - Graham writes about his early days when he used to analyze companies assuming their reports were true. And then his boss told him that most of them were fudged. Graham has also written about finding problems in financial reports & how to check for fraud.

I think corporate fraud was always there - but it gets exposed more these days than before.
 

Alchemist

Administrator
Staff member
#4
He forgot to hide the print out of Elliott Wave Theorist lying on his desk which came in the picture taken for page of magazine!
Maybe he just reads it for "amusement".

The underperformance of Prechter's newsletter is nothing short of astonishing and stunning! On an annualized basis, Prechter has underperformed the broad U.S. stock market Wilshire 5000 index by a whopping 25 percent per year!
Why Do You Publish This Nutbag Bob Prechter -- He's The Worst Forecaster EVER! - Business Insider
 
#5
@man4urheart,

I want you to answer three questions about people:

1.Do people lie?

2.Is there a higher chance of fraud if people believe they can get away with it?

3.Do people need a reason to steal?

The question arises whether investors have to believe a company's management.

Herein,an investor must apply the principle,"trust but verify".

There is also a sense of complacency that tends to build up over time when one is invested in a company, commonly referred to as falling in love with one's stocks, as time goes on, an investor needs to be aware of this bias so as to regularly review their portfolio holdings objectively.

Every method has its merits or demerits, some are not methods but people believe they are, which makes them fascinating.
 
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