Thursday, May 14, 2009

Why Equity Research Reports Are Generally Useless

I am pretty certain that most investors think that equity research in general is pretty useless. Well, let's find out why.

1) Size - Owing to the nature of the beast, they service institutional funds primarily. That being the case, they can only look at stocks that clients will buy, hold or sell. This means that at the barest minimum, they can only justify looking at stocks with market caps in excess of $100m (RM350m). That being the case, you can whack out more than two thirds of the stocks on the Bursa. (On a side note, thats also why, it does not really matter whether you have 1,100 listed companies or 1,500 listed companies... Bursa please take note, you are fighting the wrong battle if you concern yourself with that. It is more important to try to double or triple the number of companies with market caps above RM500m). Because of the population sampling, the majority of stocks will not get covered.

2) Same Old, Same Old - This literally means that established research houses will be looking at just 30-40 stocks tops. Thats all they have to do. That is also why we roll our eyes when we get another Maybank research, or another Genting research, or another TM research, etc... Too much coverage on the few and not enough on the rest. Its also funny and a bit nonsensical when we get to read 2 sells, 4 neutrals, 1 buy, 2 downgrades and 1 take profit ratings on the same ONE STOCK. Cbmf, its either just a buy or a sell, anything else is covering your ass!!!

3) Volume Stocks - Now that we have had a mild bull run for the last few weeks, the top volume stocks have been rather more hectic and vibrant. Just have a look at the top 10 or top 20, these are turning over millions of shares every day. These are the shares that smart and not so smart traders and punters are putting their hard earned money into.... right after arguing till their face is red to get the vegetable seller to reduce 20 cents for the kailan!!! How many of those stocks even have a decent research report??? Maybe one-third... which is to say 99% of the traders, investors and speculators are literally buying and selling BLIND on those top volume stocks. Hence it is natural why so many investors completely disregard the equity research reports as it will NOT help them to make money.

4) CBRS - A good idea to start with but has now been abused like a child by a group of pedophiles. Now CBRS is being used primarily by brokerage research to subsidise their operations, while churning out pathetic one two pagers to satisfy the requirements, these research staffers are then asked to spend most of their time doing "other tasks" unrelated to CBRS. The problem stems from the fact that the brokers will use the "fees" to hire cheaply, i.e. fresh graduates... dey, how to have good research from a newbie who is unsupervised??!! The second issue about CBRS is they lack a gatekeeper, you need a taskmaster who will vet, review all research submission... and the need to review their fucking spreadsheets (I suspect the majority of those reports have no spreadsheets). Even a CFA Level 1 failure can write a better research report than the majority on the CBRS. If you don't believe me, go and read a few, I have read most of the crap and its pathetic.

5) Beta Neutral - Equity research is generally on more established companies, which means they are likely to be beta neutral stocks, i.e. moving up and down in line with the index. This also means that in a bull run, their stock picks will under perform substantially. But in the recent market crash for most of last year, they also crashed spectacularly, it didn't matter whether you holding Genting or Howah Genting!!! They will never pick Talam, MK Land, SAAG etc... the best we can hope for is their TIMING ON SECTOR plays, to me thats how I use equity research to match my signals and readings on the markets. The rest are basically very expensive toilet paper!

p/s photos: Mandy Lieu


walla said...

There goes my eight million pdf's.

The analyst reports i read are those published outside the country; even removing the disclaimers, they run into some 200-400 pages; remove the second section covering counters and just read the top part which introduces the industries, business models, trends and technologies. Since much of that come from equally expensive research reports, you can intelligent summaries of the latter in the former.

And that's all.

hng said...

I do agree with you. I think stock analyst publish research report are to complement their own fund strategy. These fund manager make use their stock analyst to publicly call buy; sell; overweigth; underweight etc, to capitalize their own exit, entry investment plan.

solomon said...

What is your reading on the global economy. Are we out of wood or abyss yet?

Are the equities tried to catch up after investors overly price in depression before this?

tohff7 said...

Just take analyst reports as an entertainment dosage

Implosion said...

Analysts have to justify their fees with something. Hence the reports. :)

Eng said...

sometimes you will be surprise that the pressure is not from the fund managers but from its own investment banking team, especially when they wan to clinch a deal. They will force analysts to write a favourable report. What an analyst can do? resign? or force to do watever they asked? this is the reality happens in the industry. Do it or quit, ur boss will tell u.

I was told by a friend - when he wanted to build model for a "Bursa" stock, his boss told him to not waste time on the company and come out more report on other big companies....wat can my friend do? he is just a da gong zai..