Fundamental Analysis For Dummies, 2nd Edition

Chapter 21

Ten Things Fundamental Analysis Cannot Do

IN THIS CHAPTER

Setting realistic expectations of what you can expect when using fundamental analysis

Describing some of the hidden costs of fundamental analysis

Highlighting how the successes of famous fundamental analysts are extraordinary

Stressing fundamental analysis’s heavy reliance on guesses and estimates

I’d love to tell you fundamental analysis will make you instantly rich beyond your wildest dreams. Heck, I’d love to tell you that fundamental analysis will make you look 15 years younger, too.

Fundamental analysis is a very valuable tool – to be sure. It can be used by all sorts of investors, or even by employees, members of the public, or just about anyone interested in knowing how to gauge the health of companies.

But, fundamental analysis also has its limitations. Rather than trying to ignore the shortcomings of fundamental analysis, it’s important to recognize upfront what they are and adjust your strategy accordingly. If you don’t approach fundamental analysis with reasonable expectations and knowing what the risks are, you may certainly be disappointed with the results.

In this chapter I outline some of the primary drawbacks to fundamental analysis. I hope you don’t let these shortcomings turn you off completely from fundamental analysis. After all, understanding how companies work, how stocks are valued, and how to measure how profitable a business is are skills that can only benefit you (and enough to fill this ...