Financial Analysts: Fundamentally Flawed
Apr 8, 2022
Watch more episodes of Sosnoff & Ratigan: Truth or Skepticism
Price to earnings ratio (P/E). Gross Sales. SG&A expenses. Revenues. Earnings before interest, taxes, depreciation and amortization. Subscribers. When it comes to fundamentally valuing a company, pick your metric. In fact, pick whichever metric makes you feel best about investing or not investing. That’s what Wall St. analysts do and between you and us, it doesn’t really matter which one you use because the market is already telling you what you need to know.
There was a time, pre-internet, before 24 hours television news, before market prices were easily accessible, that an intimate understanding of a company’s financials and then an analysis of those financials was the best way to value a business. Analysts spent their days pouring over every finite detail of a balance sheet in order to assign a value they could then share with investors who could then decide if that company was worth investing in. But those days of yore are gone.
Growing up, if we didn’t feel well we went to the doctor. We needed that expert opinion. Today, rapid at-home test kits are available for most common ailments and simply typing in symptoms online can quickly give you an idea what’s wrong. The medical market evolved and is now more efficient than ever. Equity markets have evolved much the same way.
The immediate dissemination of information has replaced the need for analyst reports. Advancements in technology making market access easier and more affordable have made markets more liquid. The combination of the two has resulted in the most efficient marketplace we’ve ever seen.
The truth is, fundamental analysis is based on a metric du jour. Price to earnings ratio was the gold standard. As the internet began taking hold, revenue growth took over the reigns. In the early 2000s, EBITDA was the focus. After that, the focus shifted to subscribers. In other words, what mattered only mattered until it didn’t matter (or didn’t justify valuations).
Fundamental analysis is a moving target decided by a small group of CFOs and/or analysts. Relying on those people and their chosen valuation metric is not nearly as efficient as a liquid marketplace. In fact, one could argue the only reason financial analysts still issue reports based on fundamentals is to avoid litigation. If an opinion they issue goes wrong but is rooted in a fundamental approach, it provides legal protection. In other words, fundamental analysis is nothing more than CYA.
Written by Dylan Ratigan and Josh Fabian
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.
tastytrade is a trademark/servicemark owned by tastytrade.
tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).
tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.
Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.
Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.