A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

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HOW GOOD IS
FUNDAMENTAL
ANALYSIS?
How could I have been so mistaken as to have trusted the
experts?
—John F. Kennedy after the Bay of Pigs fiasco
I
N THE BEGINNING
he was a statistician. He wore
a white starched shirt and threadbare blue suit. He quietly put
on his green eyeshade, sat down at his desk, and recorded
meticulously the historical financial information about the
companies he followed. The result: writer’s cramp. But then
a metamorphosis began to set in. He rose from his desk,

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bought blue button-down shirts and gray flannel suits, threw
away his eyeshade, and began to make field trips to visit the
companies that previously he had known only as a collection
of financial statistics. His title now became security analyst.
As time went on, his salary and perks attracted the
attention of his female cohorts and they too donned suits.
And just about everybody who was anybody was now flying
first class and talking money, money, money. The new
generation was hip; suits were out, and Gucci shoes and
Armani slacks were in. They were so incredibly brilliant and
knowledgeable that portfolio managers relied on their
recommendations and Wall Street firms used them
increasingly to cultivate investment banking clients. They
were now equity research stars. Some, however, whispered
unkindly that they were investment banking whores.
THE VIEWS FROM WALL STREET
AND ACADEMIA
No matter what title, derogatory or otherwise, these
individuals hold, the great majority are fundamentalists. Thus,
studies casting doubt on the efficacy of technical analysis

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would not be considered surprising by most professionals. At
heart, the Wall Street pros are fundamentalists. The really
important question is whether fundamental analysis is any
good.
Two opposing views have been taken about the efficacy of
fundamental analysis. Wall Streeters feel that fundamental
analysis is becoming more powerful all the time. The
individual investor has scarcely a chance against the
professional portfolio manager and a team of fundamental
analysts.
Many in the academic community sneer at such
pomposity. Some academicians have gone so far as to suggest
that a blindfolded monkey throwing darts at the stock listings
can select stocks with as much success as professional
portfolio managers. They have argued that fund managers and
their analysts can do no better at picking stocks than a rank
amateur.
My own view of the matter is not quite as extreme.
Nevertheless, an understanding of the large body of research
on these questions is essential for any intelligent investor.
This chapter will recount the major battle in an ongoing war
between academics and market professionals and why it is

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important to your wallet.