Fundamental Invest Mar11

CFAA Fundamental Investment Discussion Attracted Strong Interest

On March 23, 2011, CFAA hosted a roundtable discussion on fundamental investing at the Union League Club of Chicago. Panelists included Vivian Lin, CFA, Executive Director and Senior Investment Analyst at UBS Global Asset Management, Harry Gao, CFA, Senior Vice President and Investment Analyst at Institutional Capital, and Larry Cao, CFA, Senior Consultant at Morningstar. The discussion was moderated by Dr. Rui Zheng, CFAA Director and Quantitative Analyst at UBS Global Asset Management. Approximately 40 members and guests participated in the event.

Rui started the panel discussion by asking Vivian to define what she considers as fundamental analysis. Vivian explained that fundamental investment is an investment approach which derives the intrinsic value of a stock based on the fundamentals of the company such as the top line growth potential, operating margin trend and cash flow generation. Many members joined the discussion by asking very to-the-point questions, and panelists responded to the questions from both a theoretical perspective as well as sharing their personal experiences.

A theoretical question was raised about how panelists put fundamental analysis into perspective against the background of CAPM theoretical framework. Panelists explained that fundamental investment is built on the premise that the stock market is semi-efficient, i.e. the market will have periodic inefficient time periods when the stock prices do not fully reflect the potential earnings power or cash flow generation ability of a company. Yet, the market tends to be efficient over the longer time period where the stock prices ultimately reflect the intrinsic value of a company.

Rui asked the panel what is a typical day at work for them, and how many stock recommendations they typically make in any given year. Vivian and Harry shared that understanding the industry trend, characteristics of a business model, as well as the stage of the life cycle of a company and industry are very critical to the quality fundamental analysis of a stock which should lead to profitable investment decisions over time. They structured their day somewhat differently, making sure that they implement their investment discipline in slightly different ways.

Members also asked how to differentiate good fundamental analysis from the average. The panelists agreed that being disciplined and committed to the respective investment thesis and philosophy is crucial to being a successful investor. They tend to separate the market noise from the essential fundamental changes of a company and reduce the behavioral impact of short-term market movement on their decision making process.

In terms of the relevant quality and qualification for being an investment analyst, the panelists pointed out that one needs to have high intellectual curiosity, strong sense of conviction and passion, as well as being open-minded and honest in order to be a good stock analyst. Ethics is another important quality for the profession.

The panel discussion received overwhelmingly positive feedback from the attendees who mostly valued the panelists’ investment knowledge and differentiated view points. There was a strong interest for a follow-up event to expand on certain areas of fundamental investment more.