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Budget: How important for stock picking?

Jul 6, 2009

The finance minister will present the Union Budget 2010 in a few hours. The financial world and especially investors, pay a lot of attention to this annual exercise. While there is no denying the importance of the event, the question is - is it viewed in its proper context? The broader question for the long term individual investor is - how much attention should he pay to recent developments and how much to its detailed history? Throw away the newspaper
It may sound shocking, but there is a school of thought which believes that current events covered by the financial media amounts to little more than noise. Mr. Nassim Nicholas Taleb says as much in the international bestseller 'Fooled by Randomness'. He believes that one should instead study financial history spanning over decades and stop fretting over daily headlines.

Mr. Jim Rogers, who's had an illustrious career as an investor, says, "If you get interested in a company and you read the annual report, you will have done more than 98% of the people on Wall Street. And if you read the footnotes in the annual report, you will have done more than 100% of the people on Wall Street. I realized right away that if I just literally read a company's annual report and the notes -- or better yet, two or three years of reports -- that I would know much more than others. Professional investors used to sort of be dazzled. Everyone seemed to think I was smart. I later realized that I had to do more than just that. I learned that I had to read the annual reports of those I am investing in and their competitors' annual reports, the trade journals, and everything that I could get my hands on. But I realized that most people don't bother even doing the basic homework. And if I did even more, I'd be so far ahead that I'd probably be able to find successful investments." Note that he does not mention the news media.

Why throw away the baby with the bathwater?
We agree that investors in general tend to underestimate the importance of past track record and overall history. At the same time though, we should not go overboard with condemning the financial media. For all its misplaced emphasis, it plays an important role in chronicling key developments. Even if an investor has a strong sense of history, he will miss out on interesting opportunities if his information is not up-dated with recent goings on.

Take the example of the most successful investor of our times Warren Buffett. He diligently reads annual reports of companies and their competitors spanning not years but decades. He has also acquired a great knowledge of financial history. But he also religiously reads about 5 newspapers every single day. In fact, several of his stock picks, especially those early in his career, were triggered by current events that he picked up from newspapers.

Conclusion
This is one topic where sitting on the fence is actually the wise thing to do. We cannot overlook the importance of current events reported in the financial media. Tracking government policy is also vitally important in India - as Dhirubhai Ambani used to say, the government is the biggest externality here. At the same time, we agree that investors would do well to read annual reports and financial history. It is something that we certainly try to do.

So, while we should pay a great deal of attention to the Union Budget that will be announced shortly; we should also do our homework on the financial history of stocks that we intend to pick.


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