Question

1. Rick goes on to discuss fundamental analysis. He notes that analysts are expected to dig into the company’s 10K filing to understand the business, identify the company’s source of competitive advantage, understand their primary growth drivers, and evaluate key risks. In doing so, he makes the following comments about best practices:

Comment 1:

Rather than trying to read the entire document, we distill the 10K filing down to the following sections: Auditor’s Report, Business Description, Consolidated Financial Statements, Management Discussion & Analysis, Risk Factors, and Legal Proceedings.

Comment 2:

To outperform the market, an investor needs to be different (and correct). The investor's differentiated opinion typically comes from an information edge, an analytical edge, or a psychological edge. As an example, we recently purchased Apple believing the company was about to enter an iPhone super cycle based on information we found in the 10K. Specifically, the company disclosed outsized purchase obligations related to their new iPhone. This is an example of an information edge.

Which of the following best describes Rick’s comments:

1. Both Rick’s comments are correct
2. Comment 2 is incorrect regarding the need for an edge
3. Comment 2 is incorrect regarding the type of edge the firm had on Apple

Answer 1

The correct answer is A. Both the comments are correct.

With respect to comment 1 as the options given already believe that the comment is correct.

For comment 2, 3 types of edges are mentioned namely information, analytical and psychological.

We can rule out analytical as on form of number crunching or data related analysis was performed.

Psycological edge does not apply either as the reason for picking the company doesnt any psychological element.

Information edge makes sense as the company has mentioned that their product already has a ton of purchase obligations meaning the product has a lot of consumer attention implying guaranteed inflows resulting in growth in revenues and share price.