|(Image from Trillium)|
Fundamental analysis is the foundation of solid investing. It helps you determine the underlying health of a company by examining the business’ core numbers: its income statements, its earnings releases, its balance sheet, and other indicators of economic health. From these “fundamentals” investors evaluate if a stock is under- or overvalued.Stock traders, mutual fund managers, and others who invest for a living look at many other factors besides the financial statements of individual companies. For example, Modern Portfolio Theory (MPT)--maybe not so modern since it was originated in 1952--holds that macroeconomic factors, in particular the "risk-free" interest rate (whose proxy is the U.S. Government bond rate), have much more powerful effects on the direction of stock prices than picking the right stocks.
Now, apparently, fundamental analysis and MPT have been pushed aside by positioning:
That’s the word used to describe how fund managers, traders, and the like have invested their portfolios....the fascination with what everyone else owns has reached a ridiculous extreme.It's a very old principle: keep an eye on what everyone else is doing. Regardless of how strongly one believes in one's analysis, don't buy when everyone is heading for the exits. Don't fight the tape.
“The market can stay irrational longer than you can stay solvent.”
--J. M. Keynes