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Db wrote: The difference lies not in whether one camp does or does not do something that the other camp does not, but in the cornerstones of each approach...

After the lessons taught by Nasdaq last year, I find myself far more middle-of-the road than I used to be. That is, fundamentals are gradually playing less of a role in my investment decisions than they used to. This was a very difficult lesson to learn, given that I cut my investing teeth at TMF with strictly fundamental analysis.

I recall reading that LTB&H based on fundamental analysis is perhaps the most speculative of all types of investing. Justin Mamis writes, "One of the single most important distinctions to understand about the market is that you are never buying or selling a company; you are bidding and offering in an auction of its shares. Prices are not determined by boards of directors, by an illustrious company name, or by an exotic product line, but solely by whatever amount someone is willing to pay or accept for that stock at any given moment."

Db: ... do stock prices rise due to demand or do they rise because the companies which are represented by those stocks are financially sound? If the former, what creates that demand? If the latter, under what conditions does financial health result in stock price appreciation? When they fall, do they fall due to a withdrawal of demand or because of a sign of financial trouble that the analyst just happened to miss? And what difference does it make?

These are great questions and something I'd like to think about further. I now use fundamental analysis more on an exclusionary basis and to get an added perspective on risk. Some rambly thoughts:

I'm finding that for an IT timeframe, market cap is probably a lot more important than I used to think. Small market caps seem to provide excessive risk due to illiquidity, competition from larger companies, limited institutional support. Very large market caps seem to have greater risk due to maturing growth, overvaluation due to investor demand for popular names, etc. A trader once told me there seems to be a glass ceiling at a market cap of around 100B, where growth of a stock tends to slow. The sweet spot may be somewhere between 1 and 20B.

For tech stocks in an environment of overvaluation, news being discounted several months forward, and rapid technological change, gain in market share (or loss of) seems to be very important. For example, technology driving the Web and now wireless Web is changing incredibly quickly; the next big thing is supposed to be the X-Internet (executable-powered two-way internet). Forrester Research chairman George Colony predicts that the X Internet will displace the Web as we know it.

On that note, I read somewhere that with the possible exception of semiconductors, stocks participate in The Next Big Thing only once. That is when some of the biggest gains are to be made, when hype and hope are greatest and it is not possible to value stocks based on traditional valuation models. I think it's important to recognize the stock action for what it is, profit from it, but take care not to get sucked into believing that the company's worth is justified. For me, this is easier said than done. Perhaps that is why some stocks seem to lose momentum once they actually become profitable and realistic valuations set in.

There are some minimum fundamental criteria that I find helpful for tech stocks that I follow, such as revenue growth rate, quality of earnings, LT debt, cash flow, deferred revenues/inventory, etc. And any whiff of aggressive accounting would make me dump the stock immediately ( sniffs these out quite well.) But I don't go back more than a year or so, and I don't try to sort out the extreme detail that some fundamentalists do. What matters is what is current and what most informed investors understand and believe about the company. It's perception that drives the stock.


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