"The price of stock has very little to do with the company it represents."
That was quoted from Dr. Alexander Elder's book, Trading for a living. This seem to agree with the fact that the market prices is often irrational.
Now, if that's true MOST times, does that mean we can throw out fundamental analysis? Since the goal of FA is to find how much is the company/stock worth, buy at a discount and hope the market will be rational some day and price it accordingly.
Would we be better off just looking at dividend yields?
Answers
2222 points
readytoretire answered 9 months ago …
I don't agree with that being a statement of fact. I think (haven't read his book) that the stock price is influenced by many things that are outside of the control of the individual company. For example, being a good company in a bad sector means that your stock will not totally reflect your value. Likewise, a good house in a bad neighborhood will not bring as good a price due to its location. When the market is in a panic, (like the past 9 months), it throws out good companies with the bad. And while the bad companies stock may go down more, they all suffer.
I would not throw out FA. It helps you identify the good companies from the bad. You need to realize that no one tool will work all the time. The market can be irrational for a long time.
Going for dividend yields sounds good. You can have gotten some dividend yields over 25% over the past few months. And then watched as the company stock went further into the ground when they cut the dividend.
2769 points
Oldman answered 9 months ago …
Ready-to-retire has made some very good points...but there's some exceptions...when the security never has paid any dividends. Jr and mid-tier materials companies are an example of a multitude of stocks wit reasonable volatility, which seldom pay dividends. Dry Bulk Shippers are example of companies that paid great dividends for 2004-2007, but when credit markets froze, by Jan. of this year, many stopped paying dividends.
When looking at the future ability of a security's being able to pay a dividend, one also has to factor in the debt-level and operational costs some company may need to cover from its earnings. That's a piece of fundamental analysis one should have before considering gaps and ascending triangles.
237 points
josephconlin answered 9 months ago …
Chris Rowe at the Tycoon Report often talks about various time frames, and I think the quote about price of a stock having little to do with the company is true to a degree in some time frames, and false to a degree in other time frames.
As others have stated, in the short term (days to weeks) and even intermediate term (weeks to months), the price of a stock can be moved by a lot of factors that the company cannot control. However, the longer the time frame you look at, the more likely that the stock price will be most largely affected by the company and its activities.
The depth of water at a dock at any given time is certainly affected by the waves that are coming in (short term the depth can change inches to a foot or more), but it is more significantly affected by the tide (longer term the depth will change by multiple feet), as an example. If you are only going to be in or near the water for a few minutes, you probably don't need to worry about the tide. If you are going to be there for an hour or more, you probably want to be aware of the tide.
I think FA is more useful in longer term situations than it is in shorter term situations, but it certainly does have utility.
192 points
seyobnats answered 9 months ago …
FA is certainly important but to a retiree , growth and dividend yield are the most important. Our income is dependent on these factors. Most of us have lost 35-50% of our stock potfolio valuations! With businesses retrenching at an alarming rate their will soon be nothing left. FA of nothing yields nothing.
Unfortunately, too many corporate executives of late have been robbing their shareholders by stacking the board of directors with their buddies. These guys vote each other obscenely greedy salaries and huge undeserved bonuses which drive down net earnings. They seem to be under the illusion that THEY own the company, not the shareholders who, in their eyes, are suckers who own nothing except the paper their shares are written on and deserve nothing!. Even failure is handsomely rewarded with Golden Parachutes! Shareholders only deserve the dregs left after these executives have robbed the till with their bonuses and the hedge funds have driven the stock market into the ground. Look at what has happened at the banks and brokerages!
Now our President has declared war on corporate GREED! Good luck! Only if he succeeds will the stock market mean anything again!
3943 points
MNSL answered 9 months ago …
Today, s market is not efficient. There is a crowd mentality as well. You must have good knowledge about market trends, market players as well. Some of these sophisticated investors and hedge fund operators can manipulate stocks, commodities for their own benefits.
Even today some stocks do not represent true value. Either it is extremely overvalued or extremely undervalued.
Average investors always should think about margin of safety. Retirees should be more careful of handling their investment and savings.
I could not believe why retirees invested in real estate and highly risky instrument including bonds, debentures in some countries before the current mess.
If we try to follow theories in some investment books we will never able to escape from the crowd mentality. Most of them are trying to tell us same thing. . I think investors should read hidden books neglected by others as well.
Investors should avoid companies who creating more and more options, instruments, shares, warrants etc in the future.
Instead they should pay attention to their growth, how they are going to achieve their targets, whether they take social responsibility seriously, whether they follow ethical business patterns, finally whether they can generate jobs continuously without announcing job cuts in recession and whether they can survive in difficult times etc.
Truly growth companies will operate in low cost environment while forecasting long term growths by realizing regular moderate profits. They will not become bankrupt.
Companies which are trying to make exorbitant profits within short period and want to maintain bubble profits plus huge remunerations plus options for top executives will end up their businesses bankrupt sooner than later. They have not prepared for unavoidable situations such as credit mess, recession, depression etc. We should avoid these types of stocks completely if you want to escape from market manipulation and to minimize losses in the future.
450 points
SallyG answered 8 months ago …
Dividends are certainly important to me when making a buy or sell decision. They reduce the effect of Mr. Market's irrationality by providing some income, which lowers what I think of as the "actual" cost basis (as opposed to the tax cost basis, which is strictly based on the prices at time of purchase and sale). What I mean is that if I pay X for a stock, it pays 2.5% a year, and I sell it at X - 2% after 2 years, I've actually received 2 years of 2.5%X in addition to the sale price, so while I've taken a loss of 2%X in absolute terms, I've actually gained 2.5%X + 0.5%X in dividends. (Is the explanation more confusing than my original statement?)
The longer you hold the stock, the more effect the dividend yield has. Still, buying stock at a discount (assuming that there is not an underlying flaw that causes the discount) makes sense: the odds are that buyers will see the bargain and drive the price up.
The points made in the earlier answers are all good (I particularly like seyobnats’ response), and bring to mind something I should add to my consideration of dividends: a comparison of dividends paid to earnings per share. I like dividends that are <60% of earnings per share, so that the company has the ability to maintain or even raise dividends, and run like mad from any company paying out more in dividends than their earnings (as Bank of America had been doing until recently).
