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Chasing the Same Signals: How Black-Box Trading Influences Stock Markets from Wall Street to Shanghai by Brian R. Brown

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Chapter 5. Disciples of Dispersion

Why Some Investors Don't Read Fundamental Research

One of the reasons black-box firms have always been an isolated group within the financial community is their treatment of fundamental research. They just don't want it.

The attitude of dismissing the importance of fundamental research is a prime contributor to the alienation of "quants" from the rest of the financial community. It's simply an unsettling disposition from the view of traditional investors because it contradicts their conventional wisdom. Fundamental stock analysis, in their view, is the staple of picking the right stocks. Good companies are founded on intangible qualities: the strength of their management teams; the quality of their business plans; their ability to execute amid economic challenges. Fundamental analysis is necessary to interpret these intangible traits.

There is no greater sentiment on the importance of fundamentals when considering "microcap" companies. A microcap stock is broadly defined as any publicly listed firm with a market capitalization of less than $250 million. The vast majority of U.S. stocks are microcap by that definition. Of the Russell 2000 index, which represents 98 percent of the U.S. market capitalization, over half are microcap stocks.

Microcap firms represent some of the most lucrative investment opportunities. Discovering a stock at its infancy can result in massive share price appreciation. A thousand-dollar investment at the early stage can grow ...

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