Going beyond research reports

I wonder if any of you have ever tried investing acting on the advice of the research reports put out by various investment banks, banking giants and brokerage houses.

I tried on an experimental basis for a whole year and am none the wiser for it.

"We are overweight on Gujarat Ambuja," the research report by one multinational bank screamed. "We are extremely bullish about the cement sector and we recommend accumulate," it added.

The report goes on to give an attractive price target, which, if it had been realised, would have made me happy.

Confidently, I put my little all into the scrip (I am a firm believer in the single scrip theory).

As predicted, the scrip rose a few rupees.......and proceeded to stay there for a good one month. At the end of the month, it looked like it wanted to go down, but I clung on, still optimistic as the bank had recommended it.

Meanwhile, I had raised more money and was waiting for other opportunities.

Another research report, this time from a well-known foreign brokerage, advocated SAIL, extolling the dream run which steel scrips were having, saying the best is yet to come. So SAIL it was, but it seemed rather wobbly from the start. It gave me a sinking feeling every time I looked at the price. But I very determinedly remained invested in it convinced that the pot of gold was just another rally away.

I could go on. While I would not say that I lost any money from acting on the recommendations of the research reports, I did not make any serious money either.

Deepak Chhabria, head of institutional equity at IL&FS Investsmart Ltd, has this to say about research reports: "We put out a lot of research reports. We comment on the investment climate in a sector or scrip at a point of time and we also give an idea of the threats facing the sector along with the future projections. The investor has to take everything into consideration before investing."

In short, consider research reports with adequate caution. The problem with them is they recommend a scrip only when the price has gone up substantially. For instance, very few brokerages would have recommended Bharti Televentures even two years back when it was quoting at less than half of the current price. Or Pantaloon Retail.

Even around five years back, research reports put out by most institutions were meant only for the eyes of their clients. Clients sometimes passed it on to reporters who then published it, without sourcing it.

However, with the advent of news television and 24 hour news channels devoted to the stock markets everything has changed. Research reports are no longer sacrosanct and are often discussed in public. One popular notion about research reports is that they recommend buying a scrip to the general public only when they are planning to sell it on behalf of their institutional or high net worth clients.

While it would be very hard to verify this, personal experience has shown that very little appreciation is available by the time the research report is public. Unless you are prepared to wait for a longer period. So does that mean that research reports are to treated as mere academic papers? Not necessarily. Since they talk about the sector and its ramifications one can take a look at the peripherals.

For instance, if the auto industry has been focussed on, take a look at the auto components sector, and try to make value picks in this segment. The trickle down effect will happen. Just do not blindly follow what a research report says. Mind you, they also are answerable to their clients for their performance and they could be hyping up the price of a scrip in a perfectly legitimate way by doing so.So there...