Key insights
- The author questions the utility of traditional fundamental analysis and value investing in the current market environment, where growth stocks and the S&P 500 have significantly outperformed value strategies. Despite DCF models suggesting market overvaluation, the market continues to reach new highs, leading to doubts about the effectiveness of Graham's techniques and the overall case for fundamental analysis.
I remember learning about the different forms of EMH in college. Weak Form made a lot of sense to me. If everyone is working with the same technical information ,what use are technical indicators? The Semi Strong Form appealed to me as well. There are much smarter Security Analysts than me, so it makes sense the “price would always be right”.
This was all until I was exposed to Value Investing through BG’s “The Intelligent Investor”. Everything in that book seemed like common sense. Why would some companies trade less than their market to book value, and why would others trade at outrageously high multiples? This is where I began using financial models (DCF is the main one) to justify purchasing undervalued stocks. (I know there are significant flaws with DCF so ignore that for now). I began doing DCF models and determined that the whole market is overvalued. Yet, it keeps on making new all time highs.
At what point is traditional fundamental analysis useless?Buying value stocks has resulted in missing out on a large portion of the gains in recent years. In most cases, you’d be better at buying and holding the S&P. Graham even acknowledged much of his techniques are outdated years ago. So what’s the case for FA and Value Investing?