The Mindless Investor Chapter 8 – You Should Not Do Fundamental Analysis

In chapter 8 of The Mindless Investor, the spotlight is on a popular approach to investing – fundamental analysis and why, according to Tyler Bollhorn, it is an inefficient approach for most small investors/traders to take when evaluating opportunities to invest in. The apparent popularity of fundamental analysis might not be driven by whether or not it works, but rather because it has been around for a long time.

Key Point #1: Fundamental Research is Expensive

Mindless Investor Ch8 Point 1 - Fundamental Analysis Takes Lots of Effort

An often heard phrase is that investors need to “do their homework”.  When it comes to fundamental analysis, however, that homework can be both extensive and expensive.  Large investors have the means and the motivation to pick through financial report after financial report, contact management and conduct extensive due diligence before considering where to park millions of dollars.  For smaller investors who don’t have the same scale of resources, conducting extensive and in-depth fundamental analysis might not be the most efficient or effective approach.

Key Point #2: Fundamental Analysis is Recommended Because it isn’t New

Mindless Investor Ch8 Point 2 - Fundamental Analysis is Familiar

The financial industry, in spite of all the risks it takes, strives to mitigate risk.  The risk of getting sued for being innovative is easy to mitigate if you simply go with the status quo.  According to The Mindless Investor, the financial industry continues to push fundamental analysis because nobody questions the “conventional wisdom” of fundamental analysis.

Key Point #3: Even Fundamental Analysis gets it Wrong

Mindless Investor Ch8 Point 3 - Even Fundamental Analysis Gets It Wrong

Even with all the data crunching that fundamental analysis entails, it can still lead to mistakes and bad decisions.  While the future is uncertain for all participants, seeking comfort in numbers can sometimes lead to a false sense of security. The approach The Mindless Investor favours is to not let fundamental analysis obscure investors from paying attention to the market’s message.  Because fundamental analysis involves such extensive research, those who do it not only invest in a company but also invest in their research process, something that can make letting go of a bad stock difficult even though the market is telling you to do so.

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4 comments

  1. You lost me there.. Nothing is full proof.. Even good traders are lucky if they win 7 times out of 10 so “You should not do Fundamental Analysis” is too definitive for my taste.. Most traders actually have poorer record then that.. So I would say it depends on the company in question.. Not much point doing FA on Google, Facebook etc. or even other really large companies since you will never get through the process but a micro, small or mid-cap, you should know what and why of the investment..

    • Hi Sultan,

      Thanks for the comment. The fundamental vs. technical question is always one of those hotly debated topics. I think you raise a good point about nothing being completely right all the time. Hopefully investors, regardless of their approach, realize that they have to mitigate the possibility that their analysis is incorrect. The point about it being difficult to do fundamental analysis on large companies like Google or Facebook is well taken. It is likely that technicians would also say it is difficult to make reliable assessments of micro or small cap companies because of the trading activity (or lack thereof), perhaps lending an advantage to fundamental analysis for these types of companies. I believe the point of the chapter is to challenge fundamental analysis on the amount of time and resources it requires in order to do better than the many market participants that are better resourced to do it well.

  2. Perhaps.. Let’s face it.. “Mindless Investor” as the title of the tome grabs your attention but the book is really about “Chart Driven Trader” and in that context fundamental analysis may not buy you much and may in fact confuse the message of the tape if your focus is on price and volume and few other basic technical key points..

    Mind you, I have not really the read the book.. Just my impression of the posted lessons.. :o) FWIW..

  3. Well, I love Benjamin Graham’s Intelligence Investors and Security Analysis for sure. Buying great companies at bargain price to their intrinsic value is the only worth thing to do. It is worthless to do any technical analysis. We should remember when we buy companies, we really buy companies, not tickers.

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