Myth 2: Look at stock fundamentals, and you can never go wrong.

This is the second in a series of ‘myth busting’ all there are 6 myths. You will find a completely contrarian view in the print media!

This is completely true some people think this is false! Only problem is people who think this is untrue do NOT know how to do fundamental analysis. For commentators who say this is not true (or is partially true) ‘fundamental analysis’ is backward looking. They look at the rear view mirror and drive. That is the analyst’s problem, not the markets!

Largely fundamental analysis means people look at the quality of management, the past performance, ratio analysis, fund flow analysis, etc. These are very important things to see, but what is also to be seen is the future – sustainability of profits, ability to attract and retain talent, continuing of market demand for the product, FUTURE CASH FLOWS, the managements willingness to share the same with the customers, etc.

Let us take the example of HUL. The biggest advantage of HUL was the great distribution reach. However if a small manufacturer can go to a BIG BAZAAR and give good volumes of say soap, BB can reach it to enough corners of the country and reap the ‘scale’ advantage. Similarly there could be a legislation against tobacco companies that could suddenly cripple ITC.

A fundamental analysis which takes the future and the past into account, combines with common sense and makes a good call will be able to say ‘look at fundamentals’. As long as the market is a slave of earnings and price earning ratio, fundamentals will work.

A caveat though, because a company CURRENTLY has good fundamentals if you buy thinking that tomorrow will be like today, you will be wrong. L&T may have had a great past, does not mean it has a great future. It if continues to make statements like ‘We can afford a Rs. 400 crore mistake’, this market will take Rs. 6500 crores off from his market capitalization!

Fundamental analysis works- if done properly. After all investors want returns – and that can come only from good companies!

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