An Examination Of Fundamentals
By Dr. M. Sury
In investing, one can select securities based on “Technical considerations” or based on “Fundamentals”. We say that the decision to select a particular security (e.g. a stock or a Bond or a commodity etc) is based on technical considerations if the information used in the decision process is solely the patterns observed in the historical returns of that security and any associated statistics.
Such an approach believes in the “pattern behavior” and that the company’s performance characteristics are already captured in the series of historical returns. In contrast, those who select a security based on Fundamentals believe that the success or failure of the investment in that security will depend on the Management Team for that security as well as the resources they have access to and how they would use those resources to steer the growth of the security. Information such as the Earnings in the past four quarters, earnings predicted for the next four quarters are most commonly used fundamentals. To be able to compare the earnings of two different securities involved in the decision process, we use PE (or price to earnings ratio). Clearly higher the PE, the price per a dollar of earnings is higher and thus the security with the higher PE is Costlier. Every thing else being equal, lower PE is preferred.
Sometimes, the price P of a security is compared to its assets (also referred to as the Book B ) and the ratio P/B (Price to Book) is used in comparing two securities, especially if the companies are in distress the investor is thinking of a Liquidation value of the remaining assets to decide on the investment.
Other fundamental information commonly used is the Debt to Equity Ratio. Clearly, the fact that debt holders have to be paid prior to holders of equity (in any liquidation) makes a security with higher Debt to Equity ratio to be less favored. It is to be noted that the revenues used to service an existing debt reduce the amount available for either growing the company or to pay dividends to the shareholders.
~ Manda Sury
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About Dr. Manda Sury
As a Principal and member of the Investment Committee at S4 Capital, Dr. Sury supervises the Firm’s quantitative/analytic programs and information architecture. In particular, Dr. Sury is responsible for the design and implementation of the portfolio optimization procedures for S4 Capital’s critically acclaimed “Efficient Portfolio Management (EPM)” process.
Dr. M. Sury is a recognized expert in the fields of portfolio optimization, equilibrium-based asset allocation, and active risk budgeting. Among his research interests are investment risk modeling (including the incorporation of non-normal skew and kurtosis, conditional value-at-risk, and regime- or state-dependent performance), alpha-beta separation (analysis and identification of the systematic risks assumed by active investment managers), and the design of high-efficiency, high-speed computational procedures to facilitate complex financial simulations and calculations.
In addition, Dr. M. Sury is responsible for engineering S4’s database architecture, which manages and integrates information across the firm’s global portfolio management, relationship management, and risk management efforts.
Dr. M. Sury had previously held a variety of senior-level technical positions in both industry and academia, including Fidelity Investment Systems Co., Lockheed Missiles & Space Co., AT&T/Bell Laboratories, and the University of Michigan. Dr. M. Sury is a prolific author, with over two-dozen major research publications in the fields of mathematics, optimization, and computer science. He received his M.S. in Mathematics, M.S. in Computer Science, and Ph.D. in Mathematics from the University of Michigan at Ann Arbor.
A loving husband, and father of two, Dr. M. Sury is cited by his son, esteemed professor and internationally recognized expert in Risk Management and Asset Allocation — Sharath Sury, as being the single most beneficial influence in his life.
