Value Research to introduce fundamentals-driven stock rating system for investors; know more Such a system could filter a large number of stocks through an objective, rulebased model to spot quality, and just as importantly, the lack of it
Dhirendra Kumar
CEO, Value Research
There’s near infinite information in the world, but most of it is not worthwhile. A lot of it is simply incorrect, but as far as information on investing goes, that’s not where the problem lies. The real danger lies in the information that is true, but useless, or even harmful. Are you wondering how correct and truthful information can be useless, harmful and dangerous?
Here’s an obvious example: stocks that have risen the most in the last one day or month, or to use the common term, stocks that have momentum. On the face of it, such a list seems valuable. After all, these stocks have done very well in the recent past, so shouldn’t they be a good investment for the future? Not really. For one, the stocks that have boomed in the recent past may be experiencing a short-term price spike, driven by speculation, rumours, or the good old ‘pump and dump’. The price rise could have, and often does have, a cyclical element, wherein the price rise leads to a price rise. These gains often reverse rapidly, leaving the greater (greatest) fool stranded. So while the price history is factually correct, it provides no insight into whether further gains are likely. The bigger danger is that the compelling, but meaningless, information wastes limited time and attention, instead of helping the investor.
Of course, this is just one example. The stream of noise that the equity investor faces is endless. Stock tips from friends, sensational headlines, latest hot trends; everyone has an opinion on the next great investment. Yet, most of this information lacks any rigour substance, or method. The same issues apply to social media pundits and other opinion peddlers. The most bombastic voices tend to attract attention with sensational and onesided takes, essentially supplying nothing but ‘disinfotainment’. Over long years of observing the noise crowding out meaningful information, I’ve noticed a few common themes.
Much of the superficial financial information aims to tap our behavioural biases, playing to our tendency to chase trends, seize confirming data, or create narratives to rationalise price movements after the event.
What investors need is not emotionally charged reactions, but a fact-driven framework, one that provides a quick quality check for every stock, as a starting point. A fundamentals-driven rating system would be ideal, provided subjective opinions played no role in it. This would have to be something purely number-driven. Such a system could filter a large number of stocks, an entire universe, ideally, through an objective, rule-based model to spot quality and, just as importantly, the lack of it. By distilling key metrics, investors could, at a glance, get a view of financial strength. The key is to have a standardised set of criteria that is applied without emotion. Human judgement is innately poor at processing lots of data into a framework.
Of course, a rating system is just a starting point, a way to sort through thousands of stocks quickly. After this comes creatively interpreting those signals with wisdom and common sense, rather than getting lost in numbers. So, does such a system exist, especially for Indian stocks? Well, now it does.
Three decades ago, we at Value Research launched Mutual Fund Ratings based on these principles. Since then, millions of Indian investors have used our rating system to choose good funds to invest in and, just as importantly, to avoid bad funds. Now, we bring the same principles and approach to our new Stock Ratings system. We will rate every stock, and the ratings are freely available and completely objective. Opinions and feelings play no role in this exercise. We have researched, designed and evolved the methodology over a long period of time, and the stocks are structured to provide this quick first-level quality check. The methodology is transparent and available for anyone to go through.
I won’t claim this is the last word on evaluating stocks simply because it’s designed to be the first word, not the last. We’ll talk about the details in the weeks to come.
The Author CEO, VALUE RESEARCH
Connect with Experts - Wealth creation made easy(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
