Fundamental Analysis Redux
25 Pages Posted: 22 May 2018 Last revised: 15 Dec 2018
Date Written: May 9, 2018
In their classic 1934 text Security Analysis, Graham and Dodd warn investors against sole reliance on a few quantitative factors in investment decisions. Instead, they recommend that investment decisions be based on a comprehensive fundamental analysis of the underlying securities. While their views held sway for many decades, recent years have witnessed a sharp reversal. Scholars of finance often overlook fundamental analysis and their influence has led to a surge of investment products relying solely on a few quantitative factors. These products often have names that appeal to fundamental analysis, such as ‘value’ and ‘quality’. I argue that Graham and Dodd’s recommendations continue to have merit. I show how popular quantitative approaches to investing overlook important information and select stocks with distorted accounting numbers rather than temporary mispricing. I conclude that informative financial reporting and comprehensive fundamental analysis are essential for the efficient functioning of capital markets.
Keywords: Fundamental Analysis, Quantitative Investing, Market Efficiency
JEL Classification: G11, G12, G14, M41
Suggested Citation: Suggested Citation