Sunday, July 18, 2021

Acting on Stock Recommendations

Stock recommendations are big business. And they are a big addictive pastime. Everyone is always eager to know the "latest stock tip" – nothing wrong with this, it is human nature to want to hear the latest gossip and sundry assorted information of a risqué nature. Stocks may not fit the classical definition of risqué but if you think about it, money is as much of a turn-on as sex is, if not more.


The thing about recommending stocks is, there is an underlying base of theory and knowledge which you need to know, but you never know which pieces of that knowledge are relevant at any point in time. Should I look at growth? Or value? Or momentum? At macro factors, industry factors, or company factors? At long-term or short-term? At buy-and-hold strategies, or quick turnover? How long is long term? Define quick?


So, everyone develops their own theories of stock picking. And they come up with different and varying recommendations. Gather a few people tracking stocks in a room and ask them for their top three picks. It is unlikely that you will find any matches. In case there is an almost uniform consensus that a certain stock is good, then that is precisely the stock one must avoid.


And, everyone will tell you when to buy. Very few people will tell you when to sell.


Also, most stock picking services "include" a particular stock into their buy list, and it stays there till "exit" is announced. AT any point in time there may be fifty stocks in the buy list, all included at various points in time. But this does not help the buyer. As a buyer, at this point in time, I have x amount of money, and I want to deploy it. In which stocks should I deploy it? That is what I am most bothered about. Looking at a list of stocks which have been recommended at various points in time, at various (lower) prices, and looking at how the prices have run up now, and looking at a list of fifty options, is hardly conducive to decision making.


So any stock picking advice needs to be specific. Ideally, if I could predict the future, I would recommend just that one stock that will go up in the next one week. But alas, that is not possible. Or, I could recommend a basket of fifty stocks, and ask you to spread your investment – however, the more one expands the list, the more one is reverting to the mean. Reversion to the mean is not the objective here, the objective is to beat the mean by a wide margin.


The objective is also to have an absolute return that is acceptable. It is not of great comfort to me, when I have suffered a twenty percent loss, to be told that I am doing well since the index has in the same period gone down by thirty percent.


Also, there has to be a commitment from the one who recommends the stocks to also trigger off a sell call.


In my fortnightly stock advisory, I try to be specific, and actionable. Typically, I recommend a list of ten or twelve stocks, with a box for entering how much money you want to invest. The model then throws up precise recommendations of how much to buy, and of which stock. I also track all my buy recommendations and advise when to sell. Between "buy" and "sell" there are periods of "hold" when a stock is not a buy, but not a sell either.


Whether I am doing well or not, only time will tell. A few months is a very short time to judge, but I seem to have started on the right note, with quite a few wins. Once a couple of years passes, and we know how much money we made (or lost) , we can pass judgement.


It is not just about the money. The money is simply a yardstick. The excitement of the game, and outsmarting the market is the real motivator.

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