Jul 19

A Story of Fundamental Analysis. A Tale of Woe.


I was chatting with some co-workers who invest and have an interest in the stock market. While chatting with them, I realized that people are confused between trading fundamentals vs technical analysis. Clearly technical analysis Aka, chart reading is the red-headed step child. When I grew up there was a saying “children should be seen but not heard”. It has become painfully apparent that that’s how charts are looked at. See them but don’t hear the message.

I showed one of my coworkers a portfolio of stock line charts, and without any training, she was clearly able to determine which stocks were healthy and which ones were sick. I was unable to convince her that some of the good healthy charts had horrible fundamentals and the sickly charts had great fundamentals. This is what prompted me to write this story.






Chapter 1 (Currently there is only one chapter).

The star of this story is a wonderful shining new company. “NQ Mobile (NQ)” is its name. I met NQ one balmy weekend while quietly doing my weekend investment review. I was working on my computer screening for fundamentally sound stocks. I entered my parameters looking for outstanding stocks. That is those with rapidly increasing earnings, phenomenal growth and an excellent product. NQ continued to show up in my screenings even as I tightened up the criteria. I recall that my fundamental screening had become so rigorous that I was left with three stocks. NQ, as you have already guessed, topped the charts.

I then looked at my NQ chart and what I saw seemed positively delightful. A rising trend line, with no overhead supply or obvious resistance levels. All in all, what could go wrong? I felt the excitement. Here after all the digging, was my holy grail. This was the one that was going to make me wealthy beyond my wildest dreams. This was the stock to end all stocks. The diamond…., well you get the picture.

I waved my magic mouse and placed my order to buy, the second the market opened on Monday morning. Not a moment should be lost. Monday came, the opening bell rang, my order executed and now I was the proud owner of a shiny new star. Let the games begin.

As all good stories go NQ continued to perform well. I liked it so much I could hear the wedding bells. And oh, the honey moon, I could not begin to tell you about the happiness of my new stock bride.

And then, the devil entered my happy paradise. I remember it well. I was driving my vehicle down the road, after a particularly satisfying, gym session when my cell phone buzzed with an NQ alert. Being a good citizen. I pulled off the road, parked and checked why I was getting an alert. I saw NQ was about 20 percent down on the day. It was still early in the day, about 10 am, when the Pacific Ocean shimmers in an azure blue. I thought ‘wow” what happened. I then pulled back on the road and hurried back to my office to get to the bottom of this mystery.

I sat down in front of my computer and read that Muddy Waters, a notorious short seller, had put out a research note on NQ. I had never heard of Muddy Waters or its proprietor Carson Block. The research note, in essence, accused NQ of being a fraudulent company. He claimed it had no meaningful product, no cash in the bank and had a list of complaints about NQ. He then wrote that he valued the stock at ZERO.

Well naturally after reading the report I though what a load of **** it was. It seemed pretty clear that his research was incoherent and a stretch. I though this will be back up tomorrow, so I bought some call options. Well dear reader you know what happened soon after. The stock dropped, and it dropped hard, so hard that a parachute would have been nice. As the day progressed NQ went down and down. It finally stopped and seemed to recover. I bought more. Clearly the research had to be wrong. The fundamentals on NQ were fantastic.

In the interests of time I will now condense the story. Over the next six months NQ remained erratic. Was it a fraud, were the fundamentals really sound? NQ continued to sign partnerships with major companies. The stock would go up for a short while and then come crashing back lower and lower.

Everyone was anxiously waiting. Big hedge fund investors were buying in to NQ following fundamental analysis. They examined the fraud charges and concluded that the fraud was Muddy Waters. They assured us retail investors that money was in the bank. I saw Bloomberg interview Carson Block. It looked to me that he had smoked something. He was incoherent and his body language emanated dishonesty.

Bloomberg interviewed Khan, NQ’s CEO. Kahn looked like he just got out of bed, his suit was rumpled, his hair uncombed, and he stammered his answer, not exactly what I would call a smooth operator. Even though he looked like a lamb thrown to the wolves, his answers made sense and he appeared truthful. It did not occur to me that no one cares about fundamentals or truth, but only in the emotion of the moment. I decided to believe multi-million dollar hedge funds over what I believed to be a charlatan.

The months rolled on, the accusations kept being refuted. A special audit committee was convened. It returned its verdict “NO Fraud”, The market went wild, and NQ ‘s price soared into recovery . We traders were all ecstatic. We were right Muddy Waters was wrong. In the middle of our celebration, the stock returned to plummeting into depths unknown. What was going on? Theories abounded. Bogey man and heroes were in every corner. Everyone had an opinion. It did not affect NQ’s stock one whit or for that matter one dollar.

So here I sit writing this story stuck underwater with huge losses that have destroyed my portfolio following the NQ fundamental story, convincing myself that earnings and growth will be the best thing since sliced cheese. I whimsically tell anyone who cares to listen, about my awful mistake. I repeat that if only I had followed my chart, trusted my technical analyses and my chart reading ability I would have been out with a small loss. Just to torture myself a bit, I look at the chart periodically and see in my notes that, not once, not twice, but three times, I could have got out with my money and dignity intact.

The moral to this story, is that following a story is not going to make you money as a trader or an investor. Stories abound and fundamentals are the story line. If you are desperate for a story, don’t get involved in a stock market drama. Save your money. Read a book or watch TV.

Older posts «