Hi Gene
February 06, 2001
As a b-schooler, here is my take. What you say is, in a way, correct, but fundamental analysis relies on the theory of efficient securities market (semi-strong form) to hold true. I’ll assume you know what this is, but for the less financially minded, the ESM theory basically means that the prices of stocks reflect all pubicly known information about a company.
So, if people are buying stocks because others are buying because of released information, this price change wasn’t the result of the information. That was unclear. Clarify. X Co – releases info. Drives their stock price from 100 – 125. 125 would be the stable price based on all publicly known information. Then, tech analysts would see this increase in price/volume and buy. This drives the price to, say, 135. The extra 10 increase was not based on publicly information – it was ‘artifically’ increased.
Assuming that the ESM theory holds true, the stock price would return to its ‘real’ value of 125 – certainly, some of the tech analysts would lose on that. Then there are market movers who basically do this on a large scale.
What I personally feel is that price changes in a stock are due to the information known about the company, market noise, and basically, some randomness. If someone is just looking at the charts, they’re taking some risk in that the price changes may not reflect the actual state of the company. Well, I don’t know if this is true, this is just what I’m guessing.
Financial institutions and accounting firms do all that analysis (25 hours in a day – sounds about right… really!) to find the present value of cash flows. It’s all that matters in finance. From what it seems, tech analysts buy a stock because of its prospect of a capital gain – buy it lower, the price raises, they sell high, keep the difference. Inversely, they can short when the prices look to drop. Etc. Etc. So what the actual company does doesn’t matter. They could all be selling rocks and this method still works.
Hmm… I don’t seem to be coming to any point in this ‘argument’. In many ways, I agree with Gene that b-schoolers are doing all the work for nothing since there’s so much theory involved. But there seems to be something intrinsically wrong in investing based on how the price moves.
Ah yes, my first and only finance course – any opportunities to make money when selling (termed arbitrage), are so quickly snapped up by the market that it’s pretty hard to get those profits. Eg. if a price of a stock is underpriced based on its current state, you can be sure that the price will truly reflect its state in less than 5 minutes. That is, assuming that ESM is true. Similarly, if a price is overpriced, it will come down to reflect its true value.
I think that is what happened to NASDAQ. What was it, it was at 5000 not too long ago? Now it’s at around 2600? I think everyone knew it was way over its real value and was DUE for a drop. Based on charts, everyone would have bought something in it, or maybe an index when it was 4500, 4600, whatever. Now its 2600… many lost big $$$.
Fundamental Analysis may be boring, but I feel it gets down the nitty gritty find the real value and not some artificially inflated value.
But that’s just what I feel and since I have 0.00 experience in actual trading, I will shutup now.
