RIM Proves Why You Can't Just Pay Attention to Fundamentals

| About: BlackBerry Ltd. (BBRY)

Yesterday’s Research In Motion (RIMM) earnings report is a great example of why you can’t just pay attention to fundamentals when trading or investing. The reason: Because price movement does not sync up with fundamentals on the short- or intermediate-term time frames. You need to take a very long view of things and be willing to take 30-40% or even higher losses to trade strictly based on your view of where a company has been and where it’s going.

In order to do that, you need to have crazy deep pockets -- Warren Buffet deep. Why is Warren such a good investor? is it because he’s a better stock picker than most? No == it’s because he’s got more capital than all of you, and he knows how to use it and when to use it. It’s the same idea as having the big stack at a poker table.

If you were strictly basing your investment decisions on RIMM’s fundamentals, you would have seen this chart.

[Click to enlarge]

Beautiful chart, eh? There is nothing in this chart that says RIMM’s fundamental story is doing anything but great. Metrics aren’t accelerating by any means, but they are growing at a very nice 30% clip. And by looking at the price and volume chart, you would have said, “It makes no sense that RIMM is so cheap; it’s down 50% in four months. Why is this stock getting killed? It’s trading at such low multiples, it’s gotta be a great value here.”

And you would have lost money the whole way down. Why? Because the fundamentals of a company do not drive supply and demand for a stock in the short and intermediate terms. Over the long term, yes, stocks and their fundamentals sync up based on historical norms in earnings and revenue multiples. But on any time frame shorter than two years -- maybe more? Good luck with that strategy.

Fundamentals matter in the short term so much as traders care to peg them to historical norms in multiples. That isn’t always the case; sometimes, as in the case of RIMM the past quarter, people just want the hell out of a stock even before they see the numbers deteriorating.

It works the same exact way with young companies growing quickly. You will see many social media, new media, peer-to-peer, and access-over-ownership companies go public in the next few years. They will have enormous multiples, and many will scream and whine about how they are overvalued. They aren’t overvalued; there is no such thing as overvalued. Everything is valued just where it should be, based on supply and demand.

Some of these companies will grow quickly enough to bring their multiples back down to more historically normal levels, and some won’t. But if you are basing investment decisions in these companies on their multiples when they IPO, you’re not investing correctly. The price of these stocks will not reflect historical norms in valuation multiples for mature companies for at least a few years, if not more. That doesn’t mean we’re in a bubble, it’s just the outcome of investors betting that the fundamentals of these companies are going to be a lot different in a few years than they are now.

They are betting the same way that they have been betting the past four months, that RIMM’s fundamentals would be a lot different after the earnings release -- which was a disaster and most likely marks the top for Research In Motion’s EPS and Revenue.

All traders trading on an intermediate-term time frame or longer should understand the fundamental trajectory of a company and its fundamental history. But if you throw these numbers into a spreadsheet and buy “value” companies, good luck to you.