The Problem With Fundamental Analysis For Individual Investors

When using fundamental analysis to determine if an investment would be worthwhile, a thorough understanding of the companies specific financial condition is performed relative to its peers. The goal is to determine if the current price of a company is less than the companies intrinsic value combined with its growth potential. Not only is a detailed financial analysis performed on each company as well as its peers, but economic trends, business conditions and management are investigated as well. The analysis of each company and industry is detailed and time consuming. Additionally, since individual stocks are far riskier than the market, you will need a portfolio of stocks with sufficient quantity and diversification that it eliminates this excess risk - this excess risk is referred to as non-market risk. This implies a detailed understanding of multiple companies across multiple industries. How many companies does it take in a portfolio to eliminate non-market risk? A general estimate is around 20 or 30 stocks(1). Therefore, in order to construct a diversified portfolio of stocks using fundamental analysis you will need to research the financial condition and prospects of 20 to 30 stocks and their peers across multiple industries. This isn't feasible for the individual investor.

1)https://businessperspectives.org/journals_free/imc/2011/IMC_2011_2_Benjelloun.pdf

 

Disclosure:

The information presented here is the opinion of the author and may quickly become outdated and is subject to change without notice. All material presented in this article are compiled from sources believed to be reliable, however accuracy cannot be guaranteed. No person should make an investment decision in reliance on the information presented here.

The information presented here is distributed for education purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or participate in any particular trading strategy.

Performance data showing past performance results is no guarantee of future returns.

Performance data showing past performance results is no guarantee of future returns.

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