Fundamental Analysis

When you have completed this chapter you will understand:

the different approaches that have been developed to facilitate the extraction of information from financial statements;

the nature and role of both fundamental analysis and technical analysis;

that, while respecting the insights that technical analysis can bring, this text adopts the fundamental analysis paradigm;

the usefulness, but also the limitations, of ratios as a means of analysis;

the importance of context and trends in properly applying these techniques.

No Sympathy for Investors Fooled by Outlandish Scams, by Stephen Taub

Can you predict the moon’s effect on equities? Can a robot pick stocks? Can a sweepstakes machine generate returns of 300 percent? No, but gullible investors still got scammed. Who needs roll-up-your-sleeves fundamental analysis to pick stocks when you could simply rely on the alignment of the stars or stock-picking robots?

These are just two scams that recent stock schemers convinced wealthy wannabes to invest in, according to SEC documents. And when you read those documents, it’s very hard to feel sorry for the victims.

Most recent case in point: A few days ago, the Securities and Exchange Commission charged that a former broker – Gurudeo “Buddy” Persaud (As a policy, I never trust a guy whose name is Buddy) – convinced family, friends, and other gullible individuals into investing in his firm, White Elephant Trading Co. All “Buddy” did was guarantee their money would be safe and throw off returns ranging from 6 to 18 percent.

And how would he pull this off? Persaud promised to invest in the debt, stock, futures and real estate markets.

However, Persaud kept to himself his secret sauce: The belief that markets are affected by gravitational forces. (Who can blame him? Everyone knows the top hedge fund managers NEVER give up their proprietary methodology.) According to the SEC’s complaint, Persaud mainly relied on a website that provided directional market forecasts based on lunar cycles and gravitational pull. How do these forces impact the markets? Persaud believed that gravitational forces affect mass human behavior, and in turn, the stock market. According to the SEC, Persaud believed when the moon exerts greater gravitational pull on the Earth, people feel dejected and are more inclined to sell securities.

The SEC said Persaud raised more than $1 million from at least 14 investors, lost $400,000 of investor funds through his trading and used at least $415,000 to pay personal expenses. Persaud – a registered representative at a Florida-based broker-dealer who operated White Elephant on the side starting in mid-2007 – also created phony account statements to hide his trading losses “and give investors a false sense of security,” the SEC noted.

(Institutional Investor (America’s Edition), June 2012)