Fundamental Analysis Redux

25 Pages Posted: 22 May 2018  

Richard G. Sloan

University of Southern California - Leventhal School of Accounting; University of California, Berkeley - Accounting Group

Date Written: May 9, 2018

Abstract

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 almost a century, 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’. Despite recent advances in quantitative finance, I argue that Graham and Dodd’s recommendations still hold true today. I show how popular quantitative approaches to investing can overlook important information and select stocks with distorted accounting numbers rather than temporary mispricing. I conclude that effective fundamental analysis is essential for efficient capital markets and requires both good financial reporting and appropriately skilled analysts.

Keywords: Fundamental Analysis, Quantitative Investing, Market Efficiency

JEL Classification: G11, G12, G14, M41

Suggested Citation

Sloan, Richard G., Fundamental Analysis Redux (May 9, 2018). Available at SSRN: https://ssrn.com/abstract=3176340 or http://dx.doi.org/10.2139/ssrn.3176340

Richard G. Sloan (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

University of California, Berkeley - Accounting Group ( email )

Haas School of Business
Berkeley, CA 94720
United States

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