What is the best stock to invest in? Not only active investors, but also buy-and-hold long-term investors are looking for these stocks that could be placed into their portfolio and represent their best stock investment.
There are different ways to invest money in the stock market. Different approaches to analysis that could find the best stock to invest in. One popular way to invest money is to use fundamental analysis, which studies economic results and business development of companies.
Flaws of fundamental analysis
I was running my own company before I started trading. Our family’s company had produced economic reports every year. And when external investors started to show interest in our company we also met auditors who made reviews of our company business and company books.
The company was finally bought by a US company that was listed on the Nasdaq stock exchange. And so we were required to provide regular quarterly reports that had to be reviewed by auditors from a well-known auditing company.
As I served as a CEO few years after this investor came and bought company I met auditors several times. I was quite shocked by how they did their audit. They were so superficial. They checked only few items. They spent only a few hours during two days to check our books. They did not ask me (as CEO) any questions. And based on this they produced the final reports necessary for the holding company to produce reports to Nasdaq.
Well we were a quite small company but even so I was very surprised how the auditors had done their job. They of course sent us a huge invoice for a big fee. Funny.
I was closely tied with my company, so I had done everything properly and had no intentions to modify the books. But I am not surprised that managers that are hired by investors and have no interest in the company other than to have a huge salary and bonuses can go and “cook” the books to look better. It is not necessarily fraud, just moving one item from one part of the book to another to increase revenues, decrease expenses, etc…
So I was not surprised when I saw the Enron case in the US several years later. The CEO and other directors of the company falsified the company’s books and mystified investors. For their own profits. Investors lost huge sums of money as they though that this was the best stock to invest in. Auditors also did not help to find the fraud.
Investors that used the company’s data to make their own fundamental analysis were shocked.
Company economic reports could have false information
So I lost my confidence in fundamental analysis. You can see why. It is so easy to provide modified info in regular quarterly reports or deceive investors by providing misleading news releases an so on.
I found that this is not rare in the business community. When I read the book Stock Market Wizards by Jack Schwager, I found similar evidence right in the first chapters of this book. One well-known investor describes his experience with analysis of companies. He visited companies to learn more about their economic results and business development, plans etc.
Here is what he found. I use excerpt from this book to demonstrate his experience of how management of companies lie to investors:
I saw Autumn Software (not true name) make a presentation at a conference. I had never heard such a great story. They produced software that was used in computer backup systems all around the world. The management team was very believable and articulate. The stock was high, but I felt it was a big momentum horse. I bought half a million shares, and the stock started to crumble almost immediately.
I called management and asked them what was happening. “We have no idea,“ they said. “Business is actually better than last month.“ One day I was out at Nantucket, and I received a phone call informing me that Autumn had just preannounced that they would have a disappointing quarter. The stock, which had closed at 30 that day, opened at 7 the next morning. It was funny because every time I had talked to the company, “business had never been better.“ That proved to me that as an outside investor you never know the truth.
How to invest in stock market using fundamental analysis
I know that a lot of people like to understand business and economic results of companies so they prefer to use fundamentals when they look for the best stock to invest in. Fine. But I recommend not using it as only as the one and only Holy Grail for selection of best stocks for your portfolio. It could be practical to use fundamental analysis together with other tools. I think a combination with stock market technical analysis. I personally do not do analysis of individual companies. I prefer to use more global macro fundamental ideas and trends.