In my commentary last evening I discussed how technical analysis and fundamental analysis differ. I mentioned that one of the flaws of fundamental analysis is that it relies too heavily on optimism.
The story surrounding Satyam Computer Services (SAY) is a perfect example of how ‘over optimism’ can lead investors astray while the charts were already screaming ‘get out’.
From the WSJ:
Satyam CEO
The chairman of one of India’s largest information technology companies admitted he concocted key financial results including a fictitious cash balance of more than $1 billion, a revelation that sent shock waves across corporate India and is likely to prompt investors to question the validity of corporate results as the once-hot economy slows.
B. Ramalinga Raju, founder and chairman of Satyam Computer Services Ltd. — “satyam” means truth in Sanskrit — said in a letter of resignation that he also overstated profits for the past several years, overstated the amount of debt owed to the company and understated its liabilities. Eventually, he said, the scheme reached “simply unmanageable proportions” and he was left in a position “like riding a tiger, not knowing how to get off without being eaten.”[...]
[...]PricewaterhouseCoopers said it was examining Mr. Raju’s statement and declined to comment further. Immediate comparisons were drawn to the watershed in U.S. corporate accounting and governance standards that stemmed from the Enron crisis.[...]
[...]In his five-page confessional letter to Satyam’s board, Mr. Raju said that initially the gap between the company’s actual operating profit and the one reflected in the books had been marginal. But as Satyam grew in size and its costs increased, so did the size of the gap. Mr. Raju fretted that if the company was seen to perform poorly, it could prompt a takeover attempt that would expose the gap, so he concocted ways to plug it.[...]
This is one of most serious flaws of fundemental analysis. It relies on people to provide transparent, true, and accurate financial statements. If you had been an investor in this company the charts would have told you to get out back when the stock price was still in the low $20′s. Now it is essentially going to be worthless.
Satyam Computer Services Stock Chart
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Chuck, do you rely on charts alone or do you do some fundamental evaluation as well?
I reckon having an overall knowledge of current economic/political trends is a form of fundamental analysis on some level.
Chuck,
No one ever expects to be blind-sided.
Except in this Market.
Today, Say…ADP REPORT and INTC’s
Warning.
Small position in RIG.
That’s it.
Much Respect,
Noel
ChipSeal..
I use the charts for trading. I research the economy to get the ‘real story’ of what is going on, not what CNBC says.
The chart may have said to get out, with the break of the trendline, but the chart can’t tell you who is commiting fraud, unfortunately.
Your friend, the Stop-Loss, would not have let you down! Their was more than enough opportunity to get out. Not arguing at all, just saying your Stop-Loss (set at a low percentage of loss??) should not be forgotten.
This is absolutely unfair.Satyam alone doesn’t deserve this kind of treatment. All the corporates are frauds!Crucify them all..& BAN the media for manipulating everyone