• Skip to primary navigation
  • Skip to main content
Mullooly Asset Management, Inc

Mullooly Asset Management

Fiduciary Fee-Only Financial Planner | Investment Advisor in Wall, NJ

  • Services
    • Wealth Management
    • Financial Planning
    • Retirement Planning
    • Investment
    • Estate Planning
  • Our Fees
  • About
  • 732-223-9000
  • Schedule A Meeting

Services

  • Wealth Management
  • Financial Planning
  • Retirement Planning
  • Investment
  • Estate Planning

Quick Links

  • About
  • Our Fees
  • Videos
  • Podcasts
  • Blog

Support

  • Contact
  • Client Login
  • Pay Bill Online
  • Form CRS
  • Our Process
Follow us on Facebook
Follow us on Linkedin
Follow us on Twitter
Watch On Youtube

Let’s talk

Why Using Only Fundamental Analysis Can Lead To Problems

August 9, 2010 by Thomas Mullooly

There are two basic ways to analyze investment opportunities:

  • Fundamental analysis, and
  • Technical analysis.

Fundamental analysis examines topics like the management of a company, the markets they serve, the products they create, manufacture and sell. Fundamental analysis also covers company earnings, corporate balance sheets and other financial data.  A large portion of fundamental research rests on the projections for future sales, estimates future revenue growth and predicted market share.

Using fundamental analysis can tell you if the stock price of a particular company is relatively cheap (or expensive) compared to their peers, or compared to the entire market in general. Much of the investment community in 2010 (still) relies on fundamental analysis to make investment decisions.

What could be wrong with fundamental research?

First, look at what was written a few lines earlier: fundamental research rests on projections.  Call them estimates, forecasts, predictions, or projections. Fundamental research and analysis is based on information provided by management.  But the information can be wrong (intentionally or not).  The forecasts are nothing more than educated guesses at what the future will bring:

  • When will their new product be available?
  • How much market share will this company grab in the next year?
  • What will be the future sales revenues?
  • What will the earnings for this company be next quarter?
  • Will the earnings for next year be higher?  And by what rate will the company grow?

This is what all investors want to know: what will happen in the future.

What ELSE could go wrong with fundamental research?

All companies change over time.  Companies will expand, some will contract.  Some corporations will hire many people, which may slow down their rate of growth (as new employees get trained).  This will also increase expenses, which may mean their earnings do meet forecasts.

Other businesses may close a division, lay off workers.  Severance pay can hurt their earnings short term.  Sometimes companies need to raise capital and will raise money by selling stock, or borrow money (and then pay interest).  Businesses may sink money into research and developing new products.  Or they move relocate their offices, or refurbish locations.  Or sell entire parts of their company.

All of these “one-time” expenses can change earnings over time.  They can also change what the company looks like (are they now larger or smaller?) going forward.

Accounting and tax laws are often changing.  This creates events where companies might recognize “one-time” gains or losses.   And there have been plenty of times where companies have gone back and “re-stated” earnings for a previous quarter (or even previous years).

The point is, none of this can be extremely predictable.
And that lack of predictability makes forecasting a tough job.

Now, after all of these events that can change the forecast for the future of a company, now add in the fact that management is often judged on “how they are doing” by the company stock price.  At times, management of a business may be too optimistic (or too aggressive) in their belief of what the future will bring.  Or they can misjudge their markets.

And this isn’t limited to company management.  The analysts that follow these companies can also be too aggressive or too optimistic.

Which makes this “prediction” business difficult. It is hard to predict the future.  In the next article, we will examine technical analysis, and (going forward), we will compare the two types of analysis.  I will share why both fundamental and technical analysis matter, to get a better understanding of how markets work.

Never miss a post...and we deliver!

newsletter mailman

Get our updates delivered right to your inbox. Sign up today!

Success! Now go and check your email to confirm your subscription.

There was an error submitting your subscription. Please try again.

We won't send you spam. Unsubscribe at any time. Powered by ConvertKit

Filed Under: Asset Management, Technical Analysis Tagged With: fundamental analysis

About Thomas Mullooly

Thomas Mullooly is owner and founder of Mullooly Asset Management, Inc. In 2002 Tom opened Mullooly Asset Management, a fee-only investment advisory firm. As an investment advisor, and not a broker, Tom works strictly for his clients. With the help of point and figure charting, Tom builds a realistic game plan for clients.

1971 State Route 34, Suite 102
Wall Township, NJ 07719

  • 732-223-9000
732-223-9600
  • support@mullooly.net
  • Services
  • About
  • Our Fees
  • Contact
  • Form CRS
  • Videos
  • Podcasts
  • Blog
  • Client Login
  • Pay Bill Online
  • Our Process

The information on this website and blog do not involve the rendering of personalized investment advice. A professional advisor should be consulted before implementing any of the options presented. None of the content contained in this website should be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

© 2022 Mullooly Asset Management Inc. All Rights Reserved.

  • Privacy
  • Disclosures and Legal Disclaimers
  • Privacy
  • Disclosures and Legal Disclaimers

© 2022 Mullooly Asset Management Inc. All Rights Reserved.