The Truth About Fundamental Analysis And Equities

You Can Not Use The Objective Past To Predict A Subjective Future

Chris Roman


CME Trade Checkers 1989 / Photoshop (Christopher Roman)

By: Christopher Roman

Many people ask me about investing and how it is connected to fundamental analysis. This is how I view fundamental analysis, in general.

You can not use the objective past to predict a subjective future

To most investors, fundamental analysis is warm and comforting to people that have their life savings tied to equities or stocks. The truth is, most institutional investors almost never keep open interest in the markets after they close. Meaning, they never keep open risk in the markets at the end of the day.

(But) Why?

There is no fundamental analysis that can predict a pandemic. There is no algorithmic system that can predict whether or not the Deepwater Horizon is going to explode. Just as there is no IT system that is going to predict whether or not the Exxon Valdez will run aground on Bligh Reef. Or the sudden and ignominious failure of the mortgage-backed securities markets.

You might be thinking, that these are just the most extreme examples and this does not happen every day and over the long term I will come out with a positive P/L in the end. Remember, within the economic cycle, there is a fiscal crisis every 10 years. Of course, 10 years is just an average and a crisis could manifest itself every 6 years over the next 20 — It is impossible to predict.

Thinking in terms of the average time to a crisis, there is no pre-ordained mandate in the universe that guarantees a return on your investments. The managers of large pools of capital are busy in the halls of congress giving payouts to your elected officials. Guaranteeing that the odds are stacked against their constituency. The interest surrounding finance capital buying homes for senators on the Nevada side of Lake Tahoe is perfectly normal. Your money is secured by the very same senators that are being paid to…