Fundamental Analysis?

This is not meant to be an excoriating post. But, as this is a competition, a little feather-ruffling is indeed not a bad thing. In fact, a verbal tete-a-tete makes these kinds of competitions exciting, right? With that in mind, consider the following.

We are MBA students. We like white shirts, crisp ties, dry-cleaned suits, and a curled upper lip. Hey, it makes us feel good. We like to cascade as much data as we can get our hands on into our Excel models, and triangulate the intrinsic value of a security. We look at P/E ratios, and if there are negative earnings P/B or P/S ratios. We all enjoy a good relative valuation, and comparison to peers. So, we bottoms-up-it and forecast value based on a host of metrics found through any halfway decent finance website.

In short, we are efficient marketeers.

Or, are we? Of how much value really is claiming that you will diligently strive to invest in fundamentals when your time horizon is 10 weeks (i.e, the length of this competition)? Rather, this competition is about fat tail events: the market dropping 2% after this week’s Fed announcement and it opening another 3% lower the next morning. This isn’t about chasing intrinsic value, which may have its place in an altogether different setting.

This competition is about fervently believing in the bull one moment, then converting and chanting the creed of the bear the next…and with conviction. You may think the Euro is ridiculously overvalued (and you might be right in the long-run), but if you short at $1.35 USD and get whipsawed back to $1.37 USD, you’ll lick your fingers after that margin call. That is my catharsis.

No, this competition is not about intrinsic value, suits, ties, and pitch-books selling well-dressed fundamentals. It’s about psychology, investor behavior, fat tails, black swans, and gut feeling.

Who will be right? We hope we are. We will see…