Fair enough. Coming from ministers with such impeccable educational backgrounds I thought it sensible to take their advice. I promptly signed up for this newsletter that sent me research reports on the prospects of different companies.
I must say the reports were very impressive. Industry analysis. Comparative analysis of various players in the industry. Ratio analysis. The reports had it all. And what’s more, they also gave me a clear idea as to what I should do in the form of a “Buy” or “Sell” advice.
I few weeks later I was completely confused. At the end of a rather comprehensive analysis of a software company “A” they put a “Hold” advice on the stock. I read further to figure out what this exactly meant
“By this recommendation of HOLD, what we mean is that existing shareholders would be better off holding onto the stock with a long-term perspective. However, if an investor would like to BUY this stock, then the upside from the current levels is about 14% CAGR. Investors could take the investment decision based on this premise.”
“Hang On”, I tell myself. “What are they really saying?”
Are they telling me that my decision to own the stock tomorrow depends on whether I own it today or not. That was definitely contrary to what my B-School management accounting professor told me. Remember, sunk costs and all that.
In essence what they were telling me is that if I already own company “A”, I should be happy with an annualised return of 14 %. However if I don’t own it, I can buy into a company “B”, (which they recommended last week) and expect an annualised return of 25%!!!
And this is in a tax regime where the costs of shifting from Stock A to Stock B are negligible for a long- term investor.
I decide to research this further. I search through their archives and come across a report on Company “A” published more than a year back. I notice that they had recommended a buy on the company in that report.
An interesting consequence of all this is that an investor owns a stock because they suggested that he buys it, and now that he owns it they suggest he continues holding it. Despite the fact that in their opinion he would make higher returns going forward if he instead owns stock B.!!! A person who subscribed to the newsletter last week would outperform a subscriber who took their advice on company A last year.
And all this is when they are RIGHT with the predictions on stock performance. God save us in the rare event that they go wrong.
Authored by Sameer Nair