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(Not) Listening to Our Customers

For our new stock advisory service, we have many happy customers and a few unhappy ones. We intend to ignore the unhappy ones. Here's why

(Not) Listening to Our Customers

About a fortnight ago, after perhaps a decade of thought and a couple of years of work, we launched our stock advisory service, Value Research Stock Advisor. The premise of the service is simple -- you become a member, and we give you access to the list of recommended stocks that our analysts maintain.

There are many other tools that are part of the service, including an absolutely fabulous stock screener and a detailed snapshot of every listed company, but the heart of what we do is the recommendation list, along with our investment thesis for each company.

In these few days since the launch, we have been gratified by the response -- thousands of investors have paid up and started using the service. However, just as interesting is the fact that about a 100 of those who signed up have cancelled their subscription and have taken the full refund that we offer. Our team has been calling these cancellers and talking to them about their reasons, and these conversations offer a fascinating glimpse of what's right and what's wrong about stock investing.

An overwhelming majority of our dissatisfied investors give two reasons for cancelling their subscriptions. One, they are looking to invest only in mid-caps and small-caps, and two, they want precise target prices for the investments they make.

So, based on this customer feedback, are we going to fix these 'flaws' in our service? Absolutely not. Simply because they are not flaws, but intentional core characteristics of our service.

We have nothing against mid-cap or small-cap stocks. In fact, a small proportion of our recommendation are mid and small. However, looking to invest only in unknown mid- and small-cap 'discoveries', which is a style of investment heavily promoted in India, is a complete no-no for us.

And our views on the second part, that of the 'target price' fixation, is just as strong. We believe that having time and price targets is for short-term traders, not for long-term investors. A good stock may turn out to be worth holding for years, while it's price goes up by many multiples. It is not possible to foresee all that and set targets today. When the time comes to sell a stock, we will issue a sell recommendation.

Think of any great stock on which Indian investors have made a fortune. Take HDFC Bank. An investment of Rs 5 lakh in this stock, made in November 2000, would be worth about Rs 1.8 crore today, which is 36X. During these years, there have been at least five occasions when any punting-type investors would have sold out either because some target has been met or some stop-loss triggered.

The way to make a fortune in the stock market is to ride the winners and get rid of the losers. This target price style is focused on selling the winners. And actually, if you are punting on broker tips (which they call research) then maybe it makes sense because no one has any confidence in those stocks and the brokers' goal is to make clients trade more and more and earn more commission.

I'm reminded of something I saw on TV a few months back (find the video below). This was a talk by Udayan Mukherjee, a famous business TV anchor who for better part of a decade had practically come to symbolise a certain short-termist approach to stock investing. Every morning, as the markets opened, he would be there, live on CNBC-TV18, giving a running commentary on every tick of the indices as the markets opened. It was breathless stuff, resembling more the radio cricket commentary of earlier years, rather than anything to do with investing. However, he is a changed man now. He said in this talk that only two things matter in investing--the management quality, and the valuation at which you buy it. Everything else is irrelevant.

It would be hard to disagree with this piece of wisdom. However, saying that only quality management and valuation matters is a good rhetorical point, but not a recipe for investing. It's like the old joke. A novice investor asks an old-timer, 'How do you make money in the market?' The wise man answers, 'Nothing could be simpler: Buy low, sell high.' The beginner asks, 'How can I learn to do that?' Comes the response, 'Ahhhh...that takes a lifetime.'

Similarly, what is quality management? What is the right valuation? Discovering these takes a lot of work, experience and cool-headed analysis. Which is exactly what we are offering you on Value Research Stock Advisor.

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