Rev Shark Is All Wet About Fundamental Investing

This past weekend I read James "Rev Shark" DePorre's book Invest Like a Shark (FT Press, 2007). The book describes how "a deaf guy with no job and limited capital made a fortune investing in the stock market." A longtime contributor to RealMoney.com, DePorre also has a Web site, SharkInvesting.com.

DePorre says the average investor can't compete with the big institutions and their superior research budgets, so fundamental research -- that is, examining the quality of net income, evaluating the durability of a firm's competitive advantage and estimating whether the company sells at a discount to intrinsic value -- is a waste of time.

Instead, the average Joe should follow a stock's price action. At the risk of oversimplifying DePorre's book, we should buy companies when they sell above their 50-day moving average, and sell when the stock falls below this same average. This type of investing is a form of technical analysis.

Imitating Warren Buffett's buy-and-hold investing method is too hard and fraught with risk, in DePorre's experience. "If you really want the best odds of making money in the market, forget the pipe dream of trying to buy a stock that will go up one-thousand-fold over the course of many years. Instead, learn to invest in stocks that are acting well right now."

I am not a chart reader, so I do not know if technical analysis works. It seems to work for DePorre, who says he turned his last $30,000 into investing profits approaching a million dollars a year by the height of the Internet mania in 2000. I do know a lot about fundamental investing, however, and a sentence on page 129 of Invest Like a Shark is false, in my opinion.

To support his point that focusing on price action rather than fundamentals is the safest approach, DePorre asks us to consider Enron, the crooked Houston-based energy trader that went bankrupt in 2001. "If you had focused on the fundamental arguments for Enron, you would have lost two-thirds of its value."

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At the time of publication, Heiserman had no positions in stocks mentioned, although holdings can change at any time.

Hewitt Heiserman conceived the Earnings Power Chart and the Earnings Power Staircase. A graduate of Kenyon College with distinction in history, Heiserman is a member of the Boston Security Analyst Society and the CFA Institute. He also authored It's Earnings That Count. For additional information, please visit Earnings Power.

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