Investors often become enamored with fundamental analysis when what they really care about is price. Great examples are the two calls I made public recently. The first was to sell Twitter (TWTR), and the second was to buy BlackBerry (BBRY). Each of these was made public on January 3, 2014, fundamental investors shunned them, but traders made money.
On a fundamental basis, everyone loves the prospect for Twitter. On the exact opposite end of the spectrum, the fundamentals for BlackBerry are deteriorating and investors who focus on the fundamentals would be more apt to avoid that stock completely.
However, as I explained to clients already, fundamentals are not going to make you money in the stock market. You can love the prospects for Twitter, for example, but the prospects for Twitter are not going to make you money if you buy the stock at the high. That same notion is true for blue chip companies as well, companies that have long term track records and companies that have products that we use every day. If you buy those companies when their prices are high you can also lose money even though the fundamentals of those companies might appear solid (ask the people who bought them in 2007).
There is a complete difference between investing based on fundamentals and investing based on price. In the examples I have offered here, these calls made at the beginning of the year focused much more on price than they did the fundamentals. Of course, we want to take a quick look at the fundamentals even when we look at price, but because price is what makes us money in the stock market an evaluation of price takes precedent.
Those fundamental investors who read my article to sell Twitter when the stock was above $70.00 discounted every word I said, while the persons who were more interested in making money than holding onto the stock for the next 10 years has appreciated my call because Twitter is down about 10% from where I made that call, and it was down as much as 20% as well.
Conversely, those fundamental investors who read my note to buy BlackBerry when the stock was near its recent lows second guessed that call as well because the fundamentals just didn't support it. However, that stock has been up by about 20% since I made that call public, and it was based on price.
The purpose of this article is to help investors realize that fundamentals are not going to make you money in the stock market. If you are interested in buying a stock and holding it for the next 10-20 years than yes, you better pay attention to the fundamentals and get to know management because you are in it for the long run (it is like getting married and getting to know the family), but if you are interested in making money in a stock that you might hold for a month or two (like dating), you are far better off paying attention to price.
One of the strategies used by Stock Traders Daily focuses solely on price, it is called the Stock of the Week strategy, and it is something that investors who are interested in making money while controlling risk can use to take advantage of the market no matter where it goes.
Ultimately, that is the benefit of focusing on price. Those investors who are focused on the fundamentals have likely been doing so for the last 15 years, and they have rode the peaks and valleys higher and lower without making significant headway over time. Yes, after 2013 their actually making money from the 2000 and 2007 peaks finally, but those investors who were focused on price, those who are more interested in short-term profits, those investors have been doing substantially better. The performance of the Stock of the Week strategy as an example proves exactly how much better that approach has been. It might take a little more work, but it pays off.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: By Thomas H. Kee Jr. for Stock Traders Daily and neither receives compensation from the publiclytraded companies listed herein for writing this article.