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Chapter 5. Fundamental Volatility > Positive and Negative Aspects of Fundamenta...

Positive and Negative Aspects of Fundamental Volatility

There are two phases to the study of fundamental volatility. First is the need to adjust reported earnings to core earnings; second is identifying which ratios to apply and use, and knowing what those reveal.

Remembering that analysis is most effective in comparative form, any fundamental test is properly compared to a series of outcomes over several quarters and years. It is also valuable to compare financial strength and earnings among many potential investment candidates sharing common characteristics—same or similar sector, similar economic cycles, close match for reasonable net return on sales, and other identifying points that make the comparison accurate and realistic. For example, it would not be reasonable to determine that IBM is a “better” investment than Wal-Mart because IBM's net return is double-digit, and Wal-Mart does more volume but reports relatively low net return. All of the attributes of these two companies are inconsistent, so that type of comparison would not be valid.


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