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Why Fundamental Analysis is Not for Retail Investors?
Fundamental Analysis has broadly two approaches, Macro and Micro (also called top down & bottom up). Macro view of the fundamental analysis looks out for parameters beyond company, e.g. International scenario, country’s GDP, energy price, govt. policy etc. Micro view looks out mostly for the parameters derived from quarterly reports like p/e ratio, EPS, cash flow, dividend etc. Retail investors get trapped in an illusion of these micro parameters which are not applicable as well as suitable to them. Reason 1: Retail investors get micro parameters of fundamental analysis from secondary source of information. These values are calculated and verified by multiple teams before publication. Moreover, many stake holders must have derived the approximation much before auditors crunched the data. So, being a retail investor you are getting step-brotherly treatment for receiving the input parameters. If your decision input itself is not fair then how can you play fair in the market? Reason2: Fundamental analysis is a cumbersome process. It is done by some private agencies and they spend lots of money on it. There is a popular proverb among finance professionals, “There is no free lunch”. So, do you believe you are getting free fundamental analysis? This is food for thought and rest you need to recall and collaborate how many times investment based on fundamental analysis has yielded you profit. Reason 3: Institutional investor’s transactions size is large. Their buying/selling pressure creates ripples in the market and stock price moves adversely for them. They need a proper analysis and look for a wide gap between current price and intrinsic price of the stock before entering the market. Being a retail investor you have many advantages. Market does not move due to your buying or selling pressure. You can enter and exit at current price of the stock at any moment. You can sense the big player’s entry/exit in the stock by significant price movement (see Rule-X). Just piggy bag on them and enjoy the fruit. Reason4: When institutional buyers take position in a stock, they have control over the decision of the company. They study which knob needs to be tuned to make the company perform better before taking position. Retail investors have no such control and they have to wait until some big player is taking position (which could be years after or never). Reason5: You have reason to believe price action derived analysis report because it is truthful to you unlike fundamental analysis. A price chart is available to you at the same time when it is accessible to institutional players. Many times even a fundamental analysis follower uses technical analysis’ help to decide exact point of entry and exit. Coming back to macro parameters of the fundamental analysis, APS takes care of sectorial weightage and suggests diversity in the same pattern. It avoids stocks beyond top 500 to ensure users are most likely exposed to companies with good corporate governance.
Hence, reading between the lines of fundamental analysis is not required at all for retail investors. An unbiased system like APS which triggers on the basis of price action is good enough for decision making.
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