is fundamental analysis worthless?
In this video you're going to learn my thoughts on fundamental analysis
you're also going to learn why in the beginning when i first started investing all i used was
fundamental analysis and why now i never use it so in my opinion i definitely believe that
fundamental analysis is worthless and before you attack me please realize that i do have a pretty
strong foundational basis for my opinion because i worked as an investment banker for a long time
i worked at Morgan stanley not as an investment banker but i worked at Morgan stanley then i
worked at cibc world markets in their industrial growth and services group under Mark Henkels then
i also worked at Petsky Prunier which is a mergers and acquisitions boutique and they're actually
some of the most active and prolific investment bankers in the entire industry when i was an
investment banker the only thing that we used to evaluate companies was fundamental analysis
we would only price companies on ev to ltm ebitda which is enterprise value to ltm ebitda which is
your last 12 months ebitda then what we would do is we would look at the precedent transactions
and then assign a multiple to the last 12 months ebitda to get a ballpark figure for what a company
was worth and then we would run an auction and whoever paid the most money for it that would
be the winner so essentially we would look at the last 12 months of the company's cash flow
we would make a few adjustments we would look at the precedent transactions to get the multiple
and then we would run an auction now this worked very well for private companies and it worked very
well as an investment banker however for public companies and as a trader and as an investor
the fundamental analysis in my opinion is not going to help you at all
for a few reasons first fundamental analysis always looks at historical data
it doesn't look at the future or the present moment when you're trading the stock market is
always forward thinking so the stock market doesn't necessarily care so much what the
company did one or two quarters ago instead what it really cares about is what the next
earnings announcements are going to be and what the future prospects are of that specific company
so there's a clear contradiction between how the market values a company relative to how investment
bankers value a company fundamental analysis looks at the past whereas the market looks to the future
now i know a lot of people are going to say that they're just going to find undervalued companies
and then buy it and then sit on it the problem with that is that you're essentially hoping
that the market recognizes its own quote unquote mistake but the reality is that
the market probably knows significantly more than you do so for you to think that the market is not
pricing a company correctly then you are betting that you're smarter than the market and all that
hundreds of millions and billions of dollars that are chasing that stock that they are wrong and you
are right and yes while it's definitely true that the market can end up increasing the value of a
stock that you're sitting on that you felt was undervalued at the time that you bought it what
more likely happened was that new developments came out which changed the perspective of that
specific company in the markets eyes and then the market has started attributing a higher valuation
to that underlying stock so i definitely do not believe that looking at fundamentals and balance
sheets and then trying to make a determination that it's undervalued relative to where it's
currently trading at is a good strategy a lot of people have gone broke that way and i definitely
do not believe that you should do that and i think that the better thing to do is if you just
look at the recent trading range and you think that a company is undervalued relative to where
it should be or where it was trading in the past then you could just simply buy it like for example
amazon was trading just about six weeks ago at over 3700 currently is trading at 32.50 i think
if someone were to buy amazon at 3200 or 32.50 right now i think that there's a decent chance
that one year from now you're going to be up money i don't think that's rocket science so if you want
to do something like that i think that's totally fine when people try to buy stocks that they
believe are undervalued you're essentially acting as a cheerleader and you're giving away your power
to the market you're essentially saying that you believe that a stock is undervalued and you're
just going to hope that the market recognizes this and eventually you're gonna end up making money
you might make money but you might not someone else might bring up and say oh well warren buffett
is huge on fundamental analysis and that's pretty much all he uses well i have two comments on this
first is none of us are warren buffett and the second probably even more important
is that warren buffett buys solid brands he's bought wells fargo he's bought american express
he's bought many solid brands and brands by themselves are incredibly valuable because when
you think of shoes what's the first brand that you think of most people think of nike in fact i
heard something which said that more people search nike than they do footwear or more people search
for nike than they do for shoes i don't know if that's accurate that anyway the point in me saying
this is that brands are incredibly valuable and i think it is definitely valid for you to buy really
strong brands that are trading at a discount so instead of spending time researching and
reading the 10ks and the 10 qs and trying to make a determination on what's undervalued versus
what's overvalued just buy really solid brands at good companies and you should do extremely well
david jaffee with beststockstrategy.com please like comment share and subscribe
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very much for your attention and i appreciate you watching this video