The Myth of Fundamentals
The most dangerous addiction for investors. Here's why.
The most dangerous addiction for investors?
Blind faith in fundamentals. Here’s why:
Fundamental analysis has long been a cornerstone of investment decisions. It evaluates financial data like profits, macroeconomic trends, and market factors, assuming that rational investors and efficient markets will translate these into predictable outcomes.
But reality tells a different story.
The truth? Fundamentals are just one piece of the puzzle. They can't predict the future, anticipate downturns, or explain market rallies disconnected from the economy. What matters most is demand.
Even worse, reliance on complex, subjective analyses often leaves investors dependent on third-party evaluations, which may not be free from conflicts of interest.
The Myth of Fundamentals
There are two main types of analysis in the financial market.
Fundamental Analysis evaluates a company's financial data, such as balance sheets, profits, price relationships, macroeconomic scenarios, market factors (like competitors), events, and even climatic factors. It claims that by understanding this data, it is possible to profit from the company's growth. This analysis is based on the premise that the market is efficient and investors are rational—a premise that presents one of its greatest problems.
The image above, taken from CNBC, illustrates a distortion between the "Real Economy" and the Financial Market. If fundamentals were truly reflected in the financial market, then with record unemployment, reduced production, sales, and company profits, the stock market would be hitting historic lows rather than historic highs.
We observe that relying on fundamentals can lead to decisions not to purchase shares in certain companies, missing opportunities in the market—or worse, losing money due to incorrect analyses failing to anticipate downturns. If fundamental analysis worked perfectly, analysts would have predicted the great stock market crash in 2008.
In addition to being unable to predict the future, fundamental analysis often leads investors to guess how far the market will fall or to hope for better conditions.
Fundamentals are only one variable, and they are meaningless without the market's verdict: DEMAND.
Fundamental analyses are complex and subjective, causing people to rely on third-party evaluations. They end up buying and selling assets based on recommendations, which are not always free from conflicts of interest between the analysts and the institutions they work for.
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