Stock Market Research: Poking and prying with a purpose!

As the eminent US author and anthropologist Zora Neale Hurston aptly remarked “Research is formalized curiosity. Backed by credible research, stock pickings have better chances of reaping rich rewards in the long run.

Jan 27, 2015 11:01 IST IIFL Amar Ambani |

A multi-bagger tip your friend promised you is suddenly having a free-fall since you bought it! How many times have we seen such a situation in the market? Daily perhaps!
 
Investors fret, yet continue to hope against hope after such a decision. But sadly, the price fall continues unabated till worry gives way to panic. Finally, with a heavy heart, they dump their ‘prized’ holding in despair.
 
Even before coming to terms with the short-lived tragic tryst, they see the market has bounced back to its erstwhile glory and maybe hitting record highs. They curse their luck; dismiss the stock market as a wretched gambling den, and vow never to invest in stocks again.
 
While their loss is indeed tragic, it’s not their luck they should be cursing. It’s their choice, or rather lack of informed choice. Earnest hope, market grapevine, dubious tips, or the latest Whats App forwards – all these imply the frailty of their choice emanating from shaky beliefs based on wishful thinking.
 
Had the investment choice been based on solid research – either self-driven or by a reliable entity on their behalf – the suffering investors would have been in a better position to put the price movement in perspective. If the scrip was fundamentally good, the temporary volatility was hardly a cause for concern as the long term prospects would have hardly changed with the dip, whether massive or minuscule. If it was a consciously picked value stock, the investors would have instead studied the price fall in the context of its evolving success story – say, of its ensuing expansion, diversification and acquisition plans, future forays, and new markets across the globe.
 
Whenever backed by credible research, stock pickings have better chances of reaping rich rewards in the long run. This is because you have a great opportunity to invest in emerging blue chips at attractive valuations. This is not to negate the element of risk integral to stock market. Many assumptions of even well-researched conclusions need to be tweaked in the light of unforeseen developments. Some even go wrong or haywire with time. However, the criticality of research in drawing up a flexible investment plan (and portfolio) can never be overemphasized.  
     
Research, as the word suggests, involves digging reports, crunching numbers, probing patterns, and identifying trends. So why not make the best of what is available from well-qualified research analysts. It remains the most credible weapon in your hand to make some crucial decisions including which stocks to buy, how much of each to buy and when to mark entries and exits. Above all, research helps you put volatility in perspective.
 
In theory, it is always easier to cheer market corrections but when they actually strike market shores, even the steeliest of investors can’t escape that sinking feeling which makes them wary, if not weak. In sharp contrast, if prices of your favourite brands – whether T-shirts, TVs or toasters - come down, buyers make a beeline to grab the discounted goodies. But when even blue chip stocks are available at deep discounts following a market correction, not many grab them to make a future killing. Research helps us break this mindset. In turn, it helps us avoid or mitigate some of the common investment errors that otherwise makes us lose hard earned money on the bourses.
 
Research backed investors are in a better position to interpret market movements and define risk tolerance in the process. We can foresee the imminent danger of a drastic fall in an exceptionally zooming market much the same way we can spot buying opportunities in a free falling market. We can study the elusive linkages between the market and the economy that directly impact our buying and selling decisions. Given this reliable light of knowledge, we can time our investing decisions with authority. A deft dissection of the market momentum helps us decide better and faster when to employ rupee cost averaging, when to cut exposure and when to take long positions.
 
Needless to say, nothing is fool-proof about stock market investments but the patronage of credible research brings together intuition, insight and analysis in a healthy churn that lends prudence and purpose to the investment game. As the eminent US author and anthropologist Zora Neale Hurston aptly remarked “Research is formalized curiosity. It is poking and prying with a purpose. ”
 
We couldn’t agree more!

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