Disadvantages and risks of fundamental analysis (FA)

It can be very time-consuming to be an investor who has to do a proper fundamental analysis. Getting a proper overview can require a lot of due diligence. Since it may take a good deal of time to do a thorough fundamental analysis, you will not be able to quickly make the decision to invest in companies/instruments or not. It is, therefore, possible that while you are doing your fundamental analysis, the company is already in the process of doing its re-pricing, and you lose the entire upswing while you are doing the analysis.

That's often why technical analysis and traders, find good fundamental companies first. They only look at price movements and thus can catch companies that are in the process of getting a re-pricing from other players in the market who have already done their due diligence.

The competitive situation against other companies in the same sector/industry is often something that is easy to lose track of. In many industries, there is great international competition with many new start-ups coming all the time. This factor is something you can quickly lose control of when doing fundamental analysis. It should always be taken into consideration that there may be other good competing companies that you have not yet discovered.

The risk of not seeing the "whole picture" during the assessment of the instrument/company is therefore something you should be aware of. As mentioned earlier, always make a reservation that the market knows something that you have not grasped and discovered.

Confirmation bias


There is a very important risk when you're doing fundamental analysis. It is as mentioned that you get a bias where you just look at the good sides (confirmation bias) of the company/instrument you have begun to evaluate. Such a "crush" on an instrument is probably the main reason why many fundamental investors lose big money in the stock market.

It is therefore important to look at ALL the fundamental sides. If something changes for the worse, you should take this into account. Do not push it under the rug because "the company is so good", "they will come back stronger at the next quarterly figures", or "the price will come up again".

Being cynical and determined on your rules is extremely important as an investor. Always be prepared to change your mind about a company or instrument should a situation change.

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