Finding Mr. Credulous in the game of stock markets is a facile task, with many investors investing based on free stock research reports, SMS tips or hearsays. After all, they are like a free lunch and who doesn’t enjoy it?
‘There’s no such thing as a free lunch’ – Milton Friedman
The perils of clinging to free research reports
- Free research reports, even if from a credible source, are generic: Every investor is different and so is their financial goals, risk appetite, investible surplus and their financial responsibilities. For e.g. Company XYZ who has been a proven tracked record in equities publishes a report on stock ABC, which is a growth stock. Growth stocks are generally high risk-high reward stocks. A risk-averse investor who is looking forward to a steady source of income in the form of dividends may be in for a ride of terrible shock if he purchases the stock.
- Doesn’t tell a story about portfolio allocation strategy: Going by the research reports, one may accumulate countless stocks, clueless what to do with them over a period of time. Also, free research reports tell you nil about the price to enter, when to exit, how much to allocate, period quarterly results, etc.
- It ignores portfolio rebalancing: The secret sauce to getting rich in the stock market is identifying the right stocks, monitoring them and portfolio rebalancing. You may purchase a strong which boasts of strong fundamentals, however, the fundamentals of a company may change time to time. Holding a stock which doesn’t hold the same growth potential is definitely not worth the candle.
Here are the 3 parameters you cannot miss on while making an investment decision based on research reports.
- Dig information on the recommended stock: Before making a stock market investment decision, conduct research on your own or ask an advisor about the intricacies involved. Ask questions such as: Is the stock suited to you? Is it a long-term stock or momentum stock? What is the downside risk?
- Check the credibility and pedigree of the research team: Is the research team has enough investing experience across various business cycles, are they registered with regulatory authority, etc.
- The depth of the research report: It is crucial that the recommendation is backed by robust research which is an amalgamation of due diligence of qualitative aspects (management decisions, goodwill, regulatory compliance, etc.) of the company, examination of its financial statements, growth trajectory, business expansion plans, sector analysis, Porter 5 forces analysis, and the list is exhaustive. Any advisor worth his salt will perform fundamental analysis of stocks by evaluating all the possible qualitative and quantitative parameters before giving any multibagger stock tips.
Investors should purchase stocks like they purchase groceries, not like they purchase perfume – Ben Graham