Monday, December 15, 2008

How Good is Fundamental Analysis

Have been reading the book - A Random Walk Down Wall Street by Burton Malkiel.

A quick summary on the chapter regarding "How Good is Fundamental Analysis?"

Apparently, two opposing views have been taken about the effectiveness of fundamental analysis. While Wall Streeters are feeling that fundamental analysis is becoming more powerful and skillful all the time, those in the academic community sneer at such pomposity. Some academics have even gone as far as saying that a blind folded monkey throwing darts at the Wall Street Journal can select stocks with as much success as the professional portfolio managers/fund managers!

Malkiel takes not such an extreme view. However, his findings show that there was no evidence of consistent superior analysts. Other researchers like Michael Sandretto of Harvard and Sudhir Milkrishnamurthi of MIT have also shown that the average annual error of the analysts were over 31.3 percent over a five year period. The message for your wallet is this:

Even the pros have enormous difficulty in performing their basic function of forecasting company earnings prospects. Investors who put blind faith in such forecasts are in for some RUDE disappointments at the end of the day.

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