|Hi there E_K_S.|
Although I’ve heard of “Chaos Theory”, I can’t say that I’m a “follower” of it, mainly because I don’t know much about it. If there’s anything I do in the way of company analysis that coincides with it, then it’s likely to be purely coincidental.
I just wonder if the variety of theories that have been proposed over the years, in order to find some form of predictive capability of the stock market’s behavior, have much, if any, merit in them. Donahue refers to mathematically related Chaos and Fractal theories. Others look to Fibonacci or Elliott Waves. I’m sure there must be many more out there.
No doubt there will be times when it may look like they're working, but then there'll be other times when they won't. So when does one know, AT THE TIME, whether it's a go or not ?!
Speaking for myself, I just prefer to keep it simple and basic. If I look at a series of a company’s Income Statements and I see the simultaneous, ongoing and appreciable increases in its top line Revenue, ongoing increases, or the maintenance, of a high EBITDA ratio, little or no effect of debt due to its low relative ratio of Interest Expense to EBITDA, a high ratio of Pretax profit to its available Capital and ongoing, appreciable increases in its Bottom Line, then I’ve found that a company that can show that, Quarter after Quarter, and Year after Year, is not a company that is likely to be rejected by informed investors, primarily because a company just couldn’t maintain those attributes if it was performing poorly as a business.
Like yourself, there was a time, long ago, that ”I used to be a believer in the Efficient Market Theory & Rational Markets but no more". And there, I’d say, we are in good company, because ‘ol Warren has publicly stated that, ”I’d be a bum on the street with a tin cup if the Markets were efficient” !
Yes, as you say ” .... the market is not always efficient in pricing a stock accordingly. Just recall the 2008/2009 crash.”
In that regard I’d contend that in situations, such as 2008/2009, many in the market place are acting in fear and uncertainty due to current conditions, be they financial, political, or whatever.
In those situations it’s often a case of getting out of stocks and putting your money into “safer” havens. In those situations the stock price of any company, be it a quality company or a dog, will very likely fall in price.
When the stock price of a company, such as Coca Cola, falls in price, due to no fault of its own, but rather due to bear-like market activity, then, IMO, one needs to keep one’s powder dry and wait for those extraneous conditions to reverse. Because the time will come when its price down trend will change direction, and once that’s confirmed then I’d say that’s the time to invest in such a company again.
Once sanity returns to the market place, the companies that will inevitably rise “from the ashes” will be those whose relevant fundamentals are still sound. And as we’ve often read, the likes of Buffett get very “greedy” at such times because so many others are “fearful” and their wide spread selling has drastically depressed stock prices.
No doubt, it’s not an easy thing to do, as one really has to have "the courage of one’s fundamental analysis convictions” to invest money in the market when the majority are moving in the opposite direction.