Fundamental Analysis

Fundamental traders believe that the future price of a stock can be predicted by looking at a company’s balance sheet, management, product line, price per earnings ratio, etc. They base their assessment of the stock based on its perceived value, rather than on price. An estimated 80% of the market traders trade on the basis of this information.

We believe this system has merit, but are concerned about a few factors. First, a company may have great products, great management, etc., but the price of the stock may not move. We’ve known some financial experts that have predicted the rise of a stock based on some new product the company is developing, and when the product was released, the price of the stock actually dropped.

Another problem with this theory is that it tends to make people think only in terms of buying a stock long and never selling a stock short. A follower of this theory would have to think in terms of a company having terrible management, bad products, and a hopeless future in order to sell the company short. Most people tend not to think this way, although there are a few successful firms that trade this methodology.

Another problem is that currently there are few databases that have fundamental information that goes back far enough for historical testing purposes. As these develop, we will try to incorporate fundamental analysis into the program.

Finally, traders of this methodology have no precise way of entering and exiting the market and can be influenced by fear and greed. How does a trader know when to get out of a stock? If you bought U.S. Steel in 1928 at $365.00, when would you have gotten out? By 1936, the stock was at $36.00.