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This week, we mark the seven-year anniversary of the fall of Lehman Brothers back in 2008. In the podcast, we quickly review how Bear Stearns and Lehman both collapsed from 2007 to 2008. We also remarked how leaders at several banks, brokerage firms, and other financial companies noted their organizations had little-to-no exposure to sub-prime mortgages. But yet, as the contagion spread, these same organizations began taking large reserves for losses discovered in their operations.
The point of rehashing all this is to point out fundamental analysis should not be written in stone — things change, all the time. While many of the financial companies may indeed had little to no exposure in sub-prime mortgages, the virus spread to many other types of investments on the books.
Earnings per share — for so many companies — are very hard to predict and even harder to project. And ultimately the earnings of many of these financial companies vanished in 2008. And in some cases, the companies themselves vanished and are no longer around.
This WHY we include the use of point and figure charting in our work.
The excellent work of our friends at Dorsey Wright and Associates, reinforces over and over that price IS the ultimate indicator. Price — what someone is willing to buy or sell an asset is an accurate indicator of the value. With that in mind, it does not matter if the company earnings are good or bad, if the economy is good or bad, if the company itself is good or bad, or even if folks are trading with inside information — ALL of that is reflected in the price.
The beauty of point and figure charting is they cut through all the noise. The lesson we take away when we see collapses in stocks (like Lehman Brothers) is the patterns and price action we see on the charts give us real-time indications. Many investors who rely strictly on fundamental analysis sometimes get surprised when companies adjust earnings (earnings in the future and, sometimes, earnings in the past). We’ll continue to fold technical analysis (like point and figure charting) into our work here at Mullooly Asset Management.