Fundamental Analysis Redux
The Accounting Review · 2019 · Volume 94 · Issue 2
Abstract
In their classic textSecurity Analysis,Graham and Dodd (1934)warn investors against sole reliance on a few quantitative factors in investment decisions. Instead, they recommend that investment decisions be based on a comprehensive fundamental analysis of the underlying securities. While their views held sway for many decades, recent years have witnessed a sharp reversal. Scholars of finance often overlook fundamental analysis, and their influence has led to a surge of investment products relying solely on a few quantitative factors. These products often have names that appeal to fundamental analysis, such as “value” and “quality.” I argue thatGraham and Dodd's (1934)recommendations continue to have merit. I show how popular quantitative approaches to investing overlook important information and select stocks with distorted accounting numbers rather than temporary mispricing. I conclude that informative financial reporting and comprehensive fundamental analysis are essential for the efficient functioning of capital markets. Data Availability:Data are publicly available from sources indicated in the text.
Keywords
fundamental analysis, quantitative investing, market efficiency
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