Security Analysis - Is It Important?There are many analysts, strategists, and portfolio managers hired to do one thing on Wall Street: beat the market. Analysts are hired to find low value stocks. Strategists are recruited to predict the direction of the market and various industries. Portfolio managers are hired to pull it all together and outpace their benchmarks, which are often measured as the S&P 500. It is accepted that there are many studies and disagreements regarding the performance of equity mutual funds, but it is safe to assume that there is about 75% of equity. mutual funds are underperforming the S&P 500. With statistics like this, it would definitely be better for individual investors to just invest in an index fund rather than try to beat the market, right?
The added value of the analysis is in the eyes of the minister:
A fundamental analyst believes analyzing strategy, management, product, financial statistics, and many other readily available and not very easily measurable figures will help select stocks that will leave the market behind. Also, it is likely that analyzing past prices has little or no value and technical analysts are likely to believe it will be better than looking at the stars.
The technical analyst believes that graphics, volume, momentum and a number of mathematical indicators carry the keys to superior performance. Technicians are equally likely to believe that the underlying data is a complete hogwash.
And then there are gold signals Random Walkers , who believe the attempt to beat the market was in vain .
So who do we believe in? Is fundamental analysis worth the time and effort? Are the technicians a bunch of quacks? Or is this all a random and futile lesson? We can begin to answer these questions by looking at the efficient market hypothesis and seeing where the fundamentalists, technicians, and random walkers stand on the question of market efficiency. After exploring this area, we will take a closer look at random walk theory, fundamental analysis, and technical analysis.
Are Markets Efficient?
The discussion about the value of analysis begins with the question of market efficiency. What exactly does the current price of a security represent? Is the current price of a security an accurate reflection of its fair value? Or are there any anomalies that give traders and investors the opportunity to beat the market by finding undervalued or overvalued securities?
"Is there information on prices?"
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Aswath Damodaran of the Stern Business School at the University describes a fertile market as a market where the market price is an unbiased estimate of the true value of the investment. That's right, but also over-simplification. In an active market, the current price of a security fully reflects all available information and is fair value. In this ideal scenario, the price is the total value of all views (rise, fall or otherwise) held by market participants. As new information emerges, the market absorbs the information by adjusting the price of the security up (buy) and down (sell). Hence, the price is fair value as the market has agreed on a price to buy and sell the security. In an efficient market, deviations above and below fair value are possible, but these deviations are considered random.
The hypothesis also suggests that if the markets are efficient, then it should be nearly impossible to sustain the market behind them. Even if deviations occur and there are times when securities are overvalued or under-valued, these anomalies will disappear as soon as they occur, making it almost impossible to profit from them.
In our experience, most of us agree that the market is not fully efficient: there are anomalies and there are traders and traders outperforming the market. Therefore, there are varying levels of market efficiency divided into three levels. These three levels also correspond to the beliefs of fundamentalists, technicians, and random walkers.
Strong Form: Technicians
The strong form of Market efficiency assumes that the current price reflects all available information. It does not matter if this information is public or private to senior management; reflected in the current price, if any. Since all possible information is already reflected in the price, investors and traders will not be able to find or exploit inefficiencies based on basic information. Generally, pure technical analysts believe that markets are Powerful Mode efficient and that all information is reflected in the price.
Semi-Powerful Format: Random Walkers
The Semi Strong form of market efficiency assumes that the current price reflects all available information. This information will likely include annual reports, gold trading signals SEC filings, earnings reports, announcements and other relevant information that can be easily made.