Skip to main content

Fundamental Analysis Is Flawed

I too started as a buy and hold investor. Like any other investor, I used tools like PE ratio,


PB ratio, EPS etc for my analysis. I compared the company PE ratio with the Market, Sector, Industry and the historic PE of the same company. I wasted a lot of money, energy and time after buying an undervalued stock and waiting for the market to discover the value.

One fine morning, it dawned on me that I must focus on market price rather than on this ratios .So I changed the formula.

   PE Ratio = Market Price / Earnings per share    TO
   Market Price = Earnings per Share * PE Ratio

So the Market price is a multiple of  EPS and a variable. This variable is nothing but the market sentiment. Our companies declare their results quarterly and this EPS remained a constant at least for a quarter .Then everything was clear, the focus should be on the sentiment rather than on earnings for the short term player.

People may argue that projected EPS is more important and we may need to research and pick stocks. I was doing all the “Research” reading the pink news paper and other published information. Later I understood all these reports were either planted or the wishful thinking of the employed analyst.

My senior (source) was working with a public sector Bank at that time and tried to predict the profitability of the particular branch where he was working and  could not. There ended fundamental analysis. How can I project the profitability of thousands of companies operating in different sectors, industries and geographical regions?

Please do analyze and predict the profitability of the company for which you are working at least for a quarter before wasting your time on other companies operating in scores of sectors and hundreds of industries.

 If you want to participate in the stock market better buy an ETF like Nifty Bees during market crashes. You will definitely do better than many professionally managed mutual funds.

If you do not have a lot of luck or right connections to get inside information, chances of becoming a successful investor is very remote. Buying lottery tickets can be a better option. Already I can see some “Fundamentalists” coming with their swords and Warren Buffet placards.

There's a small video I have made on LEADING AND LAGGING INDICATORS do watch 

REGISTRATIONS FOR OCTBOBER PERSONAL TRAINING PROGRAMME ARE ALSO OPEN
WhatsApp - 9773770675.
Labels:

Comments

Post a Comment

Popular posts from this blog

Questions and Methods for Price Action Analysis

 Winners and Losers in the Market a. Who is dominating the current swing, bulls or bears? b. Are they correct? c. If they‟re wrong: i. Where is this move likely to stall? Where is the opposite order flow likely to enter the market? ii. Where will these traders have positioned their stops? d. If they‟re right: i. Where are these traders targeting? Where are they going to take profits or lighten their position? e. If they‟re in the right direction, but late: i. Where is the worst place to be entering late in this move? Where will the late traders be stopped out? Trapped Traders a. Where is the last group of trapped traders? b. Where are they hoping to get out? How will that affect price? c. Where will they give up and bail out? How will that affect price? Expectations - Most Likely Price Movement a. What do you expect the market to do from here? i. Why do you expect that? ii. How would price have to behave prior to that move occurring? iii. Is price behaving this way? b. If the most ...
Post a Comment
Read more

Understanding Gaps in the market and trading them !!

  Common Gaps Sometimes referred to as a trading gap or an area gap, the common gap is usually uneventful. In fact, they can be caused by a stock going ex-dividend when the trading volume is low. These gaps are common (get it?) and usually get filled fairly quickly. "Getting filled" means that the price action at a later time (few days to a few weeks) usually retraces at the least to the last day before the gap. This is also known as closing the gap. Here is a chart of two common gaps that have not been filled for while but now filled up . Notice that after the gap the prices have come down to at least the beginning of the gap? That is called closing or filling the gap. A common gap usually appears in a trading range or congestion area, and reinforces the apparent lack of interest in the stock at that time. Many times this is further exacerbated by low trading volume. Being aware of these types of gaps is good, but doubtful that they will produce a trading opportunities. Brea...
Post a Comment
Read more

THE 25 - POINT MANTRA DISCIPLINE FOR DAY TRADING

The Wheel of Success in Trading  There are three spokes that make up, what I call the Wheel of Success as it relates to trading.   The first spoke is content Content consists of all the external and internal market information that traders utilize to make their trading decisions. All traders must purchase value-added content that provides utility in making their trading decisions. The most important content being internal market information , which is simply time and price information as disseminated by the exchanges. As we are making our trading decisions in present time based on time and price, In order to "scalp" the markets effectively, we must have the most live up-to-date information . The second spoke is mechanics Mechanics is how you access the markets and the methodology that you employ to enter/exit your trades. You must master mechanics before you can enjoy any success as a trader. A simple keystroke error can result in a loss of thousands . A trader can ruin his e...
Post a Comment
Read more