In this article, you're going to learn David Jaffee’s thoughts on fundamental analysis.
When David Jaffee of BestStockStrategy.com first started investing, all he used was fundamental analysis, but you can keep reading to learn why he never uses it now.
In David Jaffee’s opinion, fundamental analysis is worthless.
Before you dismiss this somewhat controversial opinion, it is important to realize that David Jaffee has a pretty strong foundational basis for his opinion because he worked as a Wall Street investment banker for a long time.
Investment Bankers Use Fundamental Analysis
David Jaffee worked at Morgan Stanley, not as an investment banker, but then he worked at CIBC World Markets in their industrial growth and services group under Mark Henkels.
David Jaffee also worked at Petsky Prunier, which is a mergers and acquisitions boutique and some of the most active and prolific investment bankers in the entire industry.
When David Jaffee was an investment banker, the only thing that he and colleagues used to evaluate companies was fundamental analysis.
As an investment banker, David Jaffee would only price companies on EV to LTM EBITDA, which is enterprise value divided by the LTM EBITDA or your last 12 months’ EBITDA.
Then, David Jaffee would look at the precedent transactions and assign a multiple to the last 12 months’ EBITDA to get a ballpark figure for what a company was worth. He would run an auction, and whoever paid the most money for it would be the winner and buy the company.
Essentially, David Jaffee and his colleagues would look at the last 12 months of the company's cash flow, make a few adjustments, look at the precedent transactions to get the multiple, and then run an auction.
This strategy worked very well for private companies and it worked very well for David Jaffee as an investment banker.
However for public companies and as a trader and an investor, David Jaffee believes that fundamental analysis is not going to help you at all for a few reasons.
Fundamental Analysis is Worthless for Options Traders
First, fundamental analysis always looks at historical data. It doesn't look at the future or the present moment.
When you're trading, the stock market is always forward thinking. The stock market doesn't necessarily care so much what the company did one or two quarters ago.
Instead, what it really cares about is what the next earnings announcements are going to be and what the future prospects are of that specific company.
There's a clear contradiction between how the market values a company relative to how investment bankers value a company.
Fundamental analysis looks at the past whereas the market looks to the future.
A lot of people may say that they're just going to find undervalued companies, buy them, and then sit on it.
The problem with that is that you're essentially hoping the market recognizes its own “mistake,” but the reality is that the market probably knows significantly more than you do.
For you to think that the market is not pricing a company correctly, you are betting that you're smarter than the market. You are saying that all of the hundreds of millions and billions of dollars that are chasing that stock are wrong and you are right.
This is a very dangerous way of gambling with your money.
While it's definitely true that the market can end up increasing the value of a stock that you're sitting on that you felt was undervalued at the time that you bought it, what more likely happened was that new developments came out which changed the perspective of that
specific company in the market’s eyes and the market has started attributing a higher valuation to that underlying stock.
David Jaffee does not believe that looking at fundamentals and balance sheets and trying to decide that it's undervalued relative to where it's currently trading at is a good strategy.
Many people have gone broke that way, and David Jaffee does not believe that you should implement that strategy.
What is better than fundamental analysis?
David Jaffee believes that a better thing to do is to look at the recent trading range. If you think that a company is undervalued relative to where it should be or where it was trading in the past, then you could simply buy equity, or stock market shares, and go long the stock.
For example, Amazon was trading about six weeks ago at over $3700. Currently, in early October 2021, it’s trading at $3250.
David Jaffee believes that if someone were to buy amazon at $3200 or $3250, there's a decent chance that one year from now they would be up money.
The strategy is simple and not rocket science.
When people try to buy stocks that they believe are undervalued, they are essentially acting as a cheerleader and giving away their power to the market.
You are essentially saying that you believe that a stock is undervalued and you're just going to hope that the market recognizes this and eventually you're going to end up making money.
You might make money, but you might not.
Does Warren Buffett use fundamental analysis?
Someone might bring up that Warren Buffett uses fundamental analysis and that he credits it with his investing success.
However, David Jaffee has two comments on this.
First, none of us are Warren Buffett.
Secondly, and probably even more important, is that Warren Buffett buys solid brands.
He’s bought Wells Fargo, American Express, and many solid brands because brands by themselves are incredibly valuable.
When you think of shoes, what's the first brand that you think of? Many people think of Nike. In some cases, people may search for “Nike” more than they do “footwear” or “shoes.”
This shows that brands are incredibly valuable, and David Jaffee believes that is it valid for you to buy really strong brands that are trading at a discount.
Additionally, the trading volume has increased significantly from when Buffett first started investing. As a result, current market prices are more accurate because you have billions of dollars chasing a fair market value of the stock after taking into account all of the available public information.
Instead of spending time researching and reading the 10-K and the 10-Q, trying to decide on what's undervalued versus what's overvalued, you’d probably be better served by just buying really solid brands of good companies when they’re trading at the low end of their recent trading range.
David Jaffee with BestStockStrategy.com teaches options traders how to win up to 98% of their trades.
His online options trading course helps traders build a watchlist of stocks for strong brands instead of relying on fundamental analysis.
Visit BestStockStrategy.com to receive $400 of free options trading training materials.