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Equity investment decisions: I rely on... - Views on News from Equitymaster
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  • Nov 7, 2003

    Equity investment decisions: I rely on...

    With the upswing in the Stock markets showing few signs of respite, almost everyone is feeling tempted to join the rally and cash in on the same. Not to be left behind, the once shy retail investor is also gradually considering investing in stock markets. However, picking fundamentally strong stocks is not an easy task. Infact, it is even more difficult to identify a stock in a bullish market, when the positives are already factored in to an extent in the stock price, making them an expensive buy. In view of the above, we conducted a poll and the question was, "For your investment decision in equities, you rely on..." and the results were as follows.

    Out of the total respondents, 55% relied on their own research before making an investment decision in equities. While 33% relied on media / newspapers before selecting a stock for investment, 12% depended upon broker research for investing in the stock market. We shall now briefly discuss the advantages (if any) and the disadvantages of each of the above three means.

    Own research:
    It was interesting to see that a majority of the respondents believed in doing their own research before investing in equities. For a person to conduct his own research, he needs to have a thorough knowledge of the company's business model, as well as an understanding of the industry in which it operates. Moreover, he should also be in a position to evaluate the impact of various macro-economic developments on the industry as well as the company. All this is possible only if he is in constant touch with the industry developments. However, given the fact that most investors prefer a diversified portfolio in order to mitigate some of the risks involved in investing in stock markets, it is very difficult for anyone to keep a track of all the companies in which he has invested or plans to invest. Thus, due to lack of adequate time, even the most knowledgeable retail investors can make mistakes and lose his money.

    Media industry and newspapers are a retail investor's cheapest source of information on a company. On the basis of the reports published in the media, an investor can keep himself updated on the latest developments in the industry as well as the company and base his investment decision accordingly. However, we have seen that on many occasions, the credibility of these reports have come under doubt. Although, off late most companies have started issuing clarifications on these media reports, they usually come to the knowledge of the investor only after he has made his investment decision. Thus the very premise, on which he has based his decision, turns out to be faulty and he may end up losing his money. Thus investors need to be cautious and not completely rely on media reports to make their decisions.

    Broker research:
    Many broking houses have their own research team, which is supposed to analyze companies and recommend the same to their clients. By relying on broker research, although a retail investor gets a professional opinion, on many occasions, the integrity of these reports have come under a cloud. Moreover, since broker commission is dependant upon the number of transactions that his client undertakes, seldom do we see a broker recommending a stock for the long-term. Frequent churning of the portfolio only adds up to the cost and in the long run, the investor ends up becoming a net loser.

    Given the limitations of each of the above methods, what option does a retail investor have?

    It is very important to understand here that owning a stock is not just owning a piece of paper, but owning a part of the company. Although, in the short run, speculation and sentiments play a role in affecting stock price movements, in the long run, fundamentals of the company is the determinant of the stock price. Hence, a detailed and thorough research of the financial and business prospects of the company is a must. Given the fact that on most occasions, research is influenced by vested interests, the need of the hour is unbiased research. Unbiased research is only possible when the research house is independent i.e., its views are not influenced by market sentiments or vested interests. Information is power and investors need to understand that unless impartially represented (in the form of research) it could be misleading and detrimental in the long run.



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