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An intense approach to stock analysis

While there are many ways of doing 'stock research', the most refined one is when you combine financial analysis with business understanding

An intense approach to stock analysis

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In recent weeks, during interactions with CEOs of companies that we have recommended on Value Research Stock Advisor, it occurred to me that stock research means very different things to different investors. There's stock research and there's stock research, but at Value Research Stock Advisor, we do stock research. That sounds like a joke but it isn't.

My point is that a very wide variety of activities get classified as investment research in equities. At the most trivial level, there are the short-term punters who trade on momentum. That needs research, no doubt. The punters have to somehow figure out what to do, so whatever they do can be called research. Then there are the chart people, but let's not discuss them at all apart from noting that they call their activities research, too.

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The problem
Then comes the first, most simple level of what one may call fundamentally driven investment and the research that goes into it. This is the level at which investors look at the past and react to it. When companies announce better results, investors buy the stock. When the results are not great, they sell. In essence, this is momentum investing, except that the momentum is that of fundamentals and not of the stock price. It sometimes works, sort of. That's because there is such a thing as momentum in the business. When a company does well, there is a probability that it will continue to do well.

When this trend is amplified by a generally happy time in the economy and/or the equity markets and combined with some luck, it can get good-enough returns. However, eventually, the ifs and buts pile up. Almost always, investors who use this approach have no deep belief in their investments. They don't really understand the business, so they have no basis for being confident in their choices. When a downturn hits, either in the fundamentals or in the stock price, they tend to panic and cut and run. Sometimes they run from companies that they should never have been in; at other times, they run from companies they should stick to.

Simultaneously, many investors are busy (mis)applying the concept of 'profit booking'. Booking profits should only mean that you think that an investment has reached a point when it has nothing further to offer in your time frame, and you would need to move the money to some other stock. It doesn't mean that just because a certain amount of profit has been made, you must 'book' it. If you immediately move the money to another investment, then you've unbooked the profit. This makes sense only if, for some reason, it's important for you to count the profitability of each stock separately. If you are thinking of your investments as a portfolio whose gains matter as a whole, then it doesn't make much sense. Basically, this lack of belief in investments leads to a hodgepodge of buying and selling and prevents investors from realising the true value of the investing decisions they make.

The solution
The solution lies in raising your investing game to the highest level. This is the only way to bring confidence in one's investments. That confidence can only come from knowledge and from having some basis for looking at the future. It cannot be obtained from just the numbers of the past. It can also not come from naive projections of those numbers into the future, which many brokerage-type analysts specialise in.

Numbers can guide us to a company, but investment decisions can only be made by understanding the business of a company. At Value Research Stock Advisor, that's exactly our approach. Our analyst team is numbers-driven, but only for part of the process.

Once the numbers have done their job, our real task begins, that of understanding the business. Only then can one have confidence in the investments. However, the job continues after we recommend the companies. As I mentioned earlier, in recent weeks, we have spent - I have personally spent - hours with the CEOs of some of the companies that we have recommended.

In each of these companies, we had a long conversation which was not just about the company itself but about the sectoral environment, competitors and the economy in general. Moreover - and this is truly important - each of these interactions were one-to-one. Unlike the mass 'management interactions' that brokerage analysts have, there's no one else in our interactions. It's just the Value Research team and the senior managers from the companies. We have this privilege because of our reputation for absolute integrity and independence that we have created and preserved by pure conduct over a quarter of a century.

The benefit of this goes to the subscribers of our premium service, Value Research Stock Advisor. While they get to read the interviews and watch the videos, our entire research process gets enhanced and benefits them.