SOS Earnings Myth

The majority investment communities and experts believe that fundamental analysis is one of the best ways to evaluate whether the stock price is over or under value. It has been used for decades and seldom do they question the validity of using earnings (mainly) as a tool to evaluate a stock price. You can see financial analysts debating with each other reading the same fact in the financial statements.

Let us explore what is what fundamental analysis cover:

Internal:

1. financial ratios
2. management track record
3. costing
4. consumer change of taste
   

External

1. country risk
2. industry performance
3. natural disaster
4. man made disaster
5. market liquidity
6. black swans

You will see the major media talking about the same thing (say oil price increase) have both positive and negative impact on share price at the same time. If today oil price goes up and share price goes up, they will say, economy is peaking hence demand for oil improve. If today oil price goes up but share price goes down, they will say earnings margin is squeeze due to high oil price. Whichever way the share price goes, they explanation is always logical.

However, does that make them right?

MyView

What if we found out that share price are more social mood driven and liquidity driven than earnings and we are moving towards the next few decade of deleveraging. It may make a mockery out of the fundamental analysis experts like it always do.