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Don't blindly rely on a research report

Nov 19, 2012

In this issue:
» Asian economies need to boost themselves with reforms
» What will happen with the coal auction?
» US confident of avoiding fiscal cliff
»  Who benefitted from QE-III
» ...and more!

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    Life for an investor is not easy. First there are over 5,000 listed companies in India that he needs to choose from. Information on all of them is not easily available at all times. Some stocks are not covered by most research houses so identifying their investment criteria and concerns is a daunting task. And some stocks are covered by so many research houses that identifying the good analysis from the bad is another uphill task. And if each of the research houses is considered to be in top 10 this task becomes even more difficult. The worst thing is when each house has a contradictory view on the same stock. What does the investor do during such times?

    An article carried by Business Standard gives examples of such problems. For instance Infosys Ltd is considered a 'Buy' by one house, a 'Hold' by another, a 'Neutral' by third and a 'Sell' by fourth. Given that each of the four research houses is a renowned name one would wonder as to whose call to go by. Situations become more difficult when research houses come out with 'sensational' reports on a particular company. For example leading brokerage Macquarie accused HDFC Ltd of aggressive accounting. The report release was followed by negative sentiments surrounding the stock of HDFC. Eventually the management aggressively countered the report. The point is that research reports can cause wide swings in investor sentiments. Therefore they do play an important role when it comes to share price movement.

    However, one must remember that these movements are temporary and therefore short term in nature. Eventually the fundamentals of the company catch up. If the fundamentals are strong and the management is clean, then the stock could still turn out to be a profitable investment. If the reverse is true, then the stock would turn out to be a disaster.

    The bottom line remains the same. While one can use the information contained in research reports and news articles, it is essential to use this information only as a basis for forming your own judgment. Just blindly following the report without doing your own study can turn out to be a disaster. When investing in a stock it is crucial to do your own homework. There is absolutely no substitute for that.

    And this is exactly what we do here at Equitymaster. While we do give credit to news reports surrounding the stock, we prefer to start from scratch and stick to basic ground work before recommending a stock. Studying annual reports, company releases, meeting the management are essential to us before we even think of bringing the stock under coverage. Given that investing is as much an art as science and hence, there cannot be a near perfect formula to invest only in winners and avoid bad stocks. But we constantly strive to achieve the same.

    When investing in stocks do you simply go by the recommendation of a research report or do your own study? Do share your comments with us or post your views on our Facebook page / Google+ page

     Chart of the day
    The recession that has gripped the world has hurt nearly every economy. But the Asian economies (ex Japan) did better as compared to the western world. As shown in the today's chart, the region did exhibit healthy rates of growth till 2012. However the question now is how long can this continue? The Asian region has seen its growth slowing down in recent times. So will growth rebound to earlier levels or is the region set to see growth stabilizing at lower levels? The thing is that the region's exports have revived to some extent. However they are still expected to remain subdued given the crisis in US and Europe. Therefore, what can help it revive growth is domestic demand. And this continues to remain subdued. To boost demand, the governments have two alternatives. One is to release economic stimulus. This will help as a short term fix but will also stoke inflation. The other alternative is to embrace policy reforms. The second would be better as it would provide a long term growth driver for the region.

    Source: Economic Times, CEIC

    As expected, the 2G spectrum auction was a flop show. After this dud, the government is worried about the auction of coal mines. It is said that none of the 54 mines that have been identified for the auction, have the required forestry approvals. It goes without saying that this would have a direct impact on valuations as bidders would be unwilling to bid aggressively for such blocks. This has put the government in a dicey situation. Should it put the blocks for auctioning with or without clearances? The coal ministry is planning to deliberate on this issue with the environmental ministry. Of course, auctioning coal mines with clearances would not only bring in better bids but also accelerate their development. But the glitch is that getting clearances for coal blocks before auctioning them would significantly delay the process. And this, in turn, would adversely affect sectors that are heavily dependent on coal such as power, cement and steel. It is worth noting that since 2008, not a single coal or lignite block has been awarded for captive use to private companies.

    The fiscal cliff is a convergence of mandatory spending cuts and the expiration of tax cuts. On January 1, 2013 Americans could face big tax increases coupled with draconian cuts in government spending. This is if President Barack Obama and his Democrats are unable to hammer out a compromise with Republicans on fundamental changes in the way the country handles its finances. There will be economic pain for virtually all Americans.

    Without a deal, Americans would find their paychecks shrunken by higher taxes - less money to spend, especially for already strapped middle income families. Compounding that, people who depend on an array of social programs from education for their children to certain health care programs would find them spending more on that even as incomes are diminished by higher taxes. For the U.S. economy as a whole, going over the fiscal cliff might end up having similar effects to the deep austerity programs in Europe that have driven the countries using the Euro currency back into recession. The US lawmakers are however confident that a deal will be struck soon between the two parties which will help them avoid this situation.

    What would you rather prefer to see, an improvement in the fundamentals of the economy so that stock prices go higher? Or tampering with the stock prices so that the resultant wealth then leads to an improvement in the fundamentals of the economy? It is indeed the first case, isn't it? For if the second scenario would have been the answer, we could have simply dropped money from helicopter and would have made everyone rich virtually overnight.

    Absurd though it may seem, US Fed Chairman Ben Bernanke is convinced that the second approach would help the US economy come out of the woods. And this is what his QE programmes were all about. But has it worked? Certainly not we believe. Though stock markets have gone up in few cases, the fundamentals of the economy have hardly improved. And there isn't any sign of the same even after the third round of easing. The reason Bernanke believes this has not worked is because the stimulation hasn't been big enough. Thus, don't be surprised if QE after QE keep happening. This is disastrous as per us. For it will do nothing but really ignite a big fire under inflation. And hence, it is very important to keep investing in the yellow metal gold we believe.

    Inflation may be coming down for now. But it doesn't mean that costs have hit their lows. The Indian Railways is expected to increase haulage rates by up to 31% for container train operators (CTOs). This is expected to impact both domestic and export-import business. The export-import business accounts for nearly 80% of the container business. Such an increase in rates would have an adverse impact on the business in the short term.

    The increase is expected in two phases. A 22% increase in two weeks and another rise in February 2013. Haulage charges, is paid to the railways for using tracks, locomotives and signaling infrastructure accounts for a little over 70% of CTOs' operating cost. Companies including Container Corporation of India, Gateway Distriparks and Hind Terminals are expected to be hurt by this move. Either margins will be hit or the impact will be passed on to customers.

    After opening the day on a positive note, the Indian equity markets are currently trading above the dotted line albeit in a range bound manner. At the time of writing, the Sensex was up by 15 points (0.1%). Among the stocks leading the gains were Maruti Suzuki and Bharti Airtel. Other major Asian stock markets have closed the day on a mixed note. On one hand Japan and Korea closed in the green. However, markets in Indonesia and Malaysia closed in the red.

     Today's Investing Mantra
    "When you build a bridge, you insist that it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing." - Warren Buffett

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    1 Responses to "Don't blindly rely on a research report"


    Nov 20, 2012

    I am by profession a software engineer and also a long term subscriber to stock select and mid cap select. For a person in the software industry, there is not enough time to spend in looking at company stocks, research it and form opinions. I personally have been blindly following my subscriptions and so far stand in good profit. I think a conclusion is to stick to a reputable research company with strong history and follow it. One can not be good at everything is my opinion.

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