Quick thought on fundamental analysis

People like to talk about fundamentals when discussing the real economy and financial markets. It provides meaning and lends a narrative to events. It’s certainly far more useful than saying ‘car prices/house prices/oil prices have crossed their two hundred day moving average’ – this does not make for engaging dinner party talk. Friends and family, for example, often talk about the demand for housing stock, limited supply coming on stream, and other such reasons for why house prices shouldn’t fall too much.

But here’s the thing. Fundamentals are fundamental and price is price. The two are related but they are not the same thing.

Even when fundamentals are positive, the price can be too expensive. And when fundamentals are poor, the price can get too cheap. Take housing for example. Regardless of immigration trends, population dynamics, etc, it is quite possible that house prices are simply way too expensive in the UK, that the housing market has priced in all these factors and a hell of a lot more. I’m not saying it is definitely the case, just that it might be so. Right now, people are giving reasons for house prices to fall (interest rates, oil prices, etc) but perhaps houses were simply overpriced and due a correction. While any combination of these fundamental factors may have triggered a correction, they may not be the true cause for the decline.

Over to financial markets, the analysts on Bloomberg and CNBC are happy to get their air time and chatter on and on about fundamentals of stock x, or economy y, when touting their buy/sell calls, but why don’t they specifically tell us what they think is ‘in the price’ and what isn’t.

Anyway, enough of the late night blabbering. Just remember to separate price from fundamentals.

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One response to “Quick thought on fundamental analysis

  1. masteroftheuniverse

    Bravo.

    Jeff

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