Fundamental Analysis and Position Trading: Evolution of a Trader

CHAPTER 17

Fundamentals: What I Use

One day, when I lived in Lowell, Massachusetts, I sat on a park bench beside the Merrimack River, trying to solve a Rubik's cube. A man walking by, stopped, and asked me about tips on solving the puzzle. He said that he was an accountant and was looking to buy Hewlett Packard stock by crunching the numbers in its annual report.

A few weeks later, I met him again and he was still shredding the annual report.

Fundamental analysis can be as complicated as you want it to be. You can become a forensic accountant by taking a microscope to the annual report and comparing it to others in the same industry. I prefer a simpler approach. This chapter describes how I tear apart the annual report to check on fundamentals, but you may want to dig deeper.

None of the fundamentals discussed below will force me to throw away a stock. Rather, they serve as a body of evidence that tells me if the company will prosper or not. If I check several research reports on the company and they are as negative as the fundamentals suggest, then I will look elsewhere for a more promising opportunity.

One flaw I have noticed over the years of doing this is that I place too much emphasis on the fundamentals. The numbers are just snapshots in time of how the company did at the end of a quarter or year. A company can win or lose a new contract, sending their business spinning in a new direction. When I have tossed away a company despite a glowing technical picture, I have often ...