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For brokerages here, it's always time to buy
PRAVIN PALANDE

TIMES NEWS NETWORK[ FRIDAY, OCTOBER 27, 2006 03:35:01 AM]

MUMBAI: Ever since the markets have been on a roll, brokerage houses have done brisk business. Every investor is dying to lay his hands on the equity analyst report issued by these brokerages. But pause for a moment and ask yourself a question: just how accurately do the stock recommendations from the growing tribe of equity analysts mirror the ups and downs of the markets?

It’s a question that throws up some interesting answers about investor psychology, if you look closely at the data Bloomberg provides on overall analyst recommendations for the Indian market. The answers get even more interesting when you contrast it with the US market.

Today, both the Sensex and the Dow are at an all-time high. Yet if you bunch up all the analyst recommendations made since ’00, when the Sensex was poised around the 3000-mark, the trend is clear: ‘buy’ recommendations in the US have been falling since ’00, while in India, the trend has remained constant, irrespective of the state of the markets.

So here’s the moot question: are US analysts simply less optimistic about the US market? Or is the Indian analyst an eternal optimist?

In ’00, when the Indian markets were trading at a price-earnings ratio (P/E) of around 23, most analysts preferred to take a long-term view on India. As a result, 72% of the recommendations were on the ‘buy’ side. Yet as the markets fell, the analysts did not budge from their ‘buy’ recommendations.

Even as the Sensex has crossed the 12K mark, the P/E is around 24 and valuations seem somewhat stretched. One would expect broking houses to aggressively start marketing ‘sell’ side recommendations. But that has not happened.

If you look at the Nifty 50, only VSNL, MTNL and Jet Airways have net ‘sell’ recommendations. Amongst the 16 recommendations available for Jet Airways, 12 are a ‘sell’. As expected, Infosys Technologies, TCS and Satyam Computers are the most recommended stocks to investors.

Broking houses in India prefer not to get drawn into the reasons behind this curious phenomenon. But privately, they admit that they prefer to give ‘buy’ recommendations. Why? It seems Indian investors suffer from a psychological loss aversion. In other words, they prefer avoiding losses than acquiring gains. So when a broker puts a ‘sell’ recommendation, it seldom prompts investors to take action on that report. The result: the broking house stands to lose business.

What’s more, broking houses also have to cope with the problem of upsetting investment banking clients, every time they put a ‘sell’ recommendation on their stock.

In the US, thanks to the SEC crackdown on irrational and somewhat exuberant reports and forecasts post-the Enron fiasco, analyst recommendations have clearly been tempered.

In fact, in the year ’00, ‘buy’ recommendations were 73% of all recommendations. In ’06, these were down to 50%.So the next time you pick up a copy of an analyst report, it might be a good idea to remember that there is always a time to sell.

"Hold" recommendation from the so called analysts is even more dangerous. One must read it as "sell" recommendation. See the problem is this. Assume that the analyst makes a recommendation to "buy". Unfortunately, the market does not oblige our analyst (this is the case most of the times). So how can he recommend sell? If he advices to sell, his followers will ask the most dangerous question, i.e. Why did you recommend it as "buy" in the first place? My dear friend, it is here where the concept of "stoploss" comes in to play. Most of us give only a lip service to "stoploss". Seldome it is implemented. Only the experienced hands understand the utility of "stoploss" and only those who are the real master of markets use it to their fullest advantage. These experienced hands will survive, whatever may be the condition of the market. They do not need the recommendation of the so called analysts. Most of them seldome follow these recommendation.

One more point. Who is following these recommendastions of so called anasysists? Majority of them are those who do not know how to do technical analysis and/or fundamental analysis. Some of them may know either of these two branches of analysis or both of them, but they may be quite lazy to do "due deligence" before picking up a stock. The difference between a successful trader and/or investor and the loosers is in knowledge and hard work. There is no short cut method for that.

True, for the Indian Analysts "SELL" is a four letter word to be avoided. They have new words now.."market Performer" meaning no point in buying this... "Market underperformer"... meaning sell quickly...

I never give a damn importance to these analyst recos. They have knowledge but most of the time just create smoky images in front of the investors. Look at the money control brokerage bullish on articles...You will see that brokerage firms are bullish on almost A to Z companies. This is because the market is in full swing. Once the landslide starts, they will be bearish on A to Z.

In terms of the market comparison, US and Indian markets are totally different.

Indian stocks just keep on going up even if the companies perform below expectation. The reason is the past glories. Same is true in case of bearish market. Stocks will go down despite the company is doing well. Why? Because everyone is selling.

This is not the case in US market. There will be some genuine reason behind the stock rise and fall. The heard mentality is there in US market too but the market never has (almost) fixed trend.

In India, all foreign firms are playing around with the Indian investors. People are thinking economy is doing really well. That is just a myth.

Once these FIIs are out, the market will come to its normal level and will not move so dynamically.

This is just my take.