For years, most of the research that has been available to retail investors has been inherently flawed due to the conflict of interest that exists between the investment banking activities of the brokerage firm and the best interest of the investing public. Because most major Wall Street firms compensated their analysts largely from their investment banking operations, biased recommendations were virtually guaranteed. As a result of huge losses and subsequent lawsuits by investors, the mainstream financial press and public have recently become more aware of these conflicts of interest and there have been efforts to reform this system. However, even if conflicts of interest are eliminated, the quality of the earnings estimates on which fundamental analysis is based is abysmally poor. Studies indicate that a simple extrapolation of earnings trends is more accurate than the forward-looking earnings estimates of Wall Street’s highly compensated analysts.

A great deal of valuable research into capital market behavior is being produced by leading academic sources, but it is virtually unknown to the vast majority of investors. This research, in many cases, is contradictory to the established practices in the profit motivated financial industry. The fact that the capital markets are highly efficient is now well accepted by most institutional investors and passively managed investment products based on market efficiency have become popular. However, the only exposure that most individual investors have had to this research is the creation of simple indexing strategies from retail mutual fund companies. We advocate the application of modern financial economic theory to construction of portfolios for individual investors, allowing them to achieve exceptional performance while carefully controlling risk.