What is the right amount of stock research? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

What is the right amount of stock research? 

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In this issue:
» Has India crossed the diesel barrier?
» 'India needs a rate cut'
» Equity drought forces Infra firms to exit projects
» Food security becomes a reality
» and more....

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When it comes to stock investing, doing your homework is critical for success. This means that you need to study everything about the company. Its financials, its business, strengths, weakness, competitive scenario, etc. All this can be boiled down to one word and that is 'information'. You need information in order to be successful at investing. And obviously the more information you have the better your investment decision should be. So is there anything like too much information in stock investing?

A recent investment blog that we came across tries to address this question. Information is critical. Especially the company's financial information. You need to know if it has enough cash and liquid assets to keep its business running. At the same time it is important to know that the company is in profits and is dishing out incremental returns. Because these returns would keep adding to the company's cash and liquid assets. Looking at the company's cash flows is essential too. For if it is using the cash unproductively then the balance sheet advantage will eventually disappear. Therefore financial information is critical.

Knowing the company's business is critical too. What business is it in? Which industry is it operating in? What is the path being taken by its competitors? How is the company defending or protecting itself from the competitive forces? Is it doing something different which will help it earn the incremental returns that we were attracted to when we saw the financials? These questions are important too. A lot of these answers depend on the company's management. If it is proactive, robust and ethical then the answers to all of the above questions will be positive.

Now, you do need to know if expenses are going to go up or not. But as an investor do you really need to know how much is the company planning to spend on each of its employees? Do you really need to know exactly how much of advertising rupee it will spend on each product? At some point of time dishing out more information will mean that the company is sharing sensitive information. Information which on becoming public can dilute the company's competitive advantage. Because its competitors will use it to their advantage. This is when the information will become too much information. And it is really not that necessary to get into this kind of granularity just to arrive at an investment decision.

For instance you don't need to know the weight of a person to know if he is fat or not. Similarly you do not need to get into each line item of the company's financial model to know if it is good and available cheap or not. Building complex financial models will eventually make you dependent on getting more and more information. But it will make you lose out on the bigger picture. So make sure you do your homework by gathering information on the company. But make sure you remember to draw the line on too much of it. If the company looks good, you have done your homework and it is available cheap then go ahead and invest in it. If not, then stay away from it. It is really as simple as that.

Do you think that getting into granular nitty gritties of a business is essential for making an investment decision? Share your comments with us or post your views on Facebook page / Google+ page

01:38  Chart of the day
The telecom sector had witnessed a bumper period till recently. Most of the gains seen by the companies were driven by the increasing subscriber base. But in recent times this growth seems to be fading away. The total number of subscribers (for GSM only) has been declining in recent months. In the month of December 2012, total subscriber base declined by 6.6 m. One reason behind this decline is market saturation as penetration rates have crossed 70%. But the bigger reason for the decline is people discontinuing the practice of keeping multiple connections. As tariffs have reached rock bottom, most operators have cut back on offering freebies along with new connections. As free minutes and other such goodies have been cut down, subscribers prefer to cut back on the number of connections that they have.

Source: Cellular Operators Association of India

Responding to threat of rising fiscal deficit and a possible rating downgrade, the Government seems to be biting the bullet bit by bit on diesel prices. The Government has empowered oil companies to hike diesel prices in a phased manner. It's a brave step indeed. The oil companies have responded with a hike of 50 paisa per liter. But will this euphoria last? Let us see the finer points.

The diesel currently incurs around Rs 9.6 per litre of under recoveries. In comparison, small price hikes will be a drop in the ocean as far as curbing fiscal deficit is concerned. While oil companies have been authorized for time to time price hikes, there is no clarity on the amount and time frame for the same. Few years back petrol was fully decontrolled. Yet, oil companies incurred losses on it as they hardly ever raised prices without government permission. With 'regulated' price hikes expected on diesel, we would rather be conservative on follow up action. Especially because this will have cascading impact on various sectors resulting and can lead to inflation spiraling.

With the date of the next monetary policy review fast closing in, suggestions seem to be pouring in from all sides. Needless to say most of these are for the Reserve Bank of India (RBI) to take that big step of announcing an interest rate cut. Latest to join the chorus is Mr Nilesh Shah, one of the senior executives at Axis Bank Ltd. Talking to a leading business daily, Mr Shah expects a 0.25% cut from India's central bank in its forthcoming review. He is of the view that a cut of this magnitude may hardly move the needle. But it will certainly carry the positive sentiment as per him.

Well, we don't quite agree. Simply because, an economy does not function on positive sentiments alone. Just ask Bernanke how his policies of trying to improve sentiments in the US have come a cropper. Despite endless QEs , GDP growth has failed to live up to expectations and employment has barely improved. Thus, what matters are fundamentals and not sentiments. We believe RBI is right in waiting for the inflation situation to improve before pulling the trigger on a rate cut. For the growth that will result out of this will have much stronger legs. Cutting interest rates even as inflation is high is certainly not advisable. For it will lead to even higher inflation down the road as excesses of the past have not been removed from the system.

The Food Security Bill finally seems to be a reality. The standing committee on food, consumer affairs and public distribution signed off on the Bill yesterday which nearly matches the recommendations made by the National Advisory Council. The Bill provides that 75% of the rural population and 50% of the urban population be identified as single category of beneficiaries. There are two points that stand out. First is the mechanism by which the government will identify this single category of beneficiaries. The second is the impact that it will have on the government's overall subsidy bill. As far as the latter is concerned, the government expects the incremental rise to be marginal. The Bill is bound to earn the ruling UPA brownie points ahead of the general elections. But it all depends on how it chooses to implement it. As the past has shown, many such welfare schemes have not really yielded the desired benefits. This is on account of massive corruption seeping in. If the government is also able to bolster warehousing facilities and prevent wastage, it will go a long way in boosting food security. It will also help in dousing inflationary trends in the longer run

Project approval, environmental issues and land acquisition have been major hurdles for long. Infrastructure projects have contended with these since last couple of years. Notwithstanding the resultant delays and cost escalations, the government has articulated ambitious plans. Building 20 kilometers of roadways a day was just one of them. But it seems a late realization has dawned upon the government regarding another issue. Public private partnership plans for funding large infra projects have made no headway. Banks have backed off from many of these projects due to asset liability mismatches. Infrastructure funding companies too are very selective. Hence many projects are at the mercy of private equity funds. There too raising equity has not been easy for most players.

NHAI in particular has highlighted this problem in road building projects. The body managed to award just 1,000 km of roadway contracts this financial year. This was against a target of 9,500 kms. But there too firms have exited citing lack of funds. Hence '20 kilometers of roadways a day' is a distant dream for India for the time being.

Air India has become synonymous with a troubled airline. Just when things were appearing to improve somewhat, a new problem has put a spoke in its wheels. It is reported that the state-run airline had to ground its six Boeing 787 Dreamliners yesterday. Apparently, regulators and airlines in Europe and South America have also grounded the Dreamliner. This was after doubts were raised about the plane's batteries.

It is worth noting that the 787 Dreamliner has a list price of US$ 207 m (approximately Rs 11.2 bn). The aircraft is said to be fuel-efficient as it uses weight-saving composite materials. It has been touted as an important breakthrough in the way aircrafts are designed and built. Air India had been pinning all its hope on the 787 Dreamliner for its turnaround. The carrier has 27 Dreamliners on order. The deliveries had commenced in September 2012. Subsequently, it reported profits at the operating (EBITDA) level in November and December. This recent glitch is the last thing that it may have asked for. Given that its turnaround depends on this Dreamliner, it would only be hoping that the problem gets sorted as soon as possible.

In the meanwhile after opening the day on a positive note, Indian equity markets continue to trade above the dotted line. At the time of writing, the Sensex was up by 103 points (0.5%). Barring Malaysia the other major Asian markets closed on the day on a positive note.

04:55  Today's Investing Mantra
"The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective." - Warren Buffett

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    5 Responses to "What is the right amount of stock research?"


    Jan 19, 2013

    Most of the times one requires common sense and lots of common sense for any investment or business. Unfortunately people lack or don't use common sense. Imagine how could an individual succeed in investments competing fund managers, hedge funds, complex quant models , who have all the means and access to corporate managements but for simple common sense with good research but not extensive research


    hardik jain

    Jan 18, 2013

    all your article are plz semd me my emailid



    Jan 18, 2013

    How much time a small investor has to go into so many details? I feel one should first focus on the industry, next growth in turnover and net profit. For example, one can leave out airlines and textiles altogether from one's horizon, of course with some rare exceptions. Technology also overwhelms suddenly upsetting existing knowledge and faith.



    Jan 18, 2013

    Commenting on a factual error - petrol prices were decontrolled in 2006. UPA, took over the price control, raised petrol prices till they reached 45% above those in US,claiming diesel needs subsidy, and is now raising diesel prices too, which incidentally are just 3-5% below those in US.

    This is simply a kleptomaniac government at work - the only 'reforms' it does is cartelize and raise prices.


    devinder chowdhury

    Jan 18, 2013

    dear sir,

    first of all , i would like to appreciate you for the knowledge you are giving to the investors/ readers who are interest in the equity as well as in economy of Inida, furthermore, you company has enumerated a various equity and its impact and rate i myself has gain a lot. I am a reglar reader of your e-mail magainzine and is very much attracted towards your comment . I hop you will keep continuing this process.

    thanking you

    devinder chowdhury

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