Fundamental analysis of “buy and hold” companies is correlation forex system quaint, Warren Buffetish notion that probably works in the long term. But as Keynes said, in the long term we’re all dead. The big risk in today’s über-correlated markets is systemic shock. One can practice due diligence on a company and buy at a reasonable valuation, but if global markets collapse the next day and don’t recover for years, one has paid a lot in opportunity cost.
Fundamental analysis is valuable so long as the basic fabric of capital markets remains intact. Precisely when and how it will occur is anyone’s guess, but, unfortunately, old school techniques like cross-asset class and regional diversification have lost their glimmer. Risk-off is limited to the USD, JPY, “safe” sovereigns and gold. Regional and sectoral equity correlations are on the rise. Developed Market equities are increasingly correlated, as are various asset classes. Oil tankers used to have one, big compartment in their hull. In choppy waters, that oil would slosh back and forth, the momentum of which threatening to capsize the vessel.
A new method was adopted: separate the oil into smaller compartments, which would diminish the momentum of the swaying liquid and increase stability. A highly recommended film, the original analogy was about Glass-Steagall and Gramm-Leach-Bliley Act. Global markets used to be divided, where risks in one part of the world would not affect others. The difficulty for long-term investors is diversification. Short-term traders act like lemmings, pilling into one asset and then another, rocking the boat with ever greater force – destabilizing the entire craft. There is so much money sloshing around and few places to hide.