How to really use expert advise ?

If you read Sheena Iyengar's fantastic book "The Art of Choosing"  you will understand that in areas where we don't have expertise we should seek advise to make decisions. Given that financial literacy in not taught in schools and most of the people pick investments like clothes, investing definitely fits the above bill. But a lot of times financial experts have ulterior motives read earning cut from brokerage houses and almost no accountability for their public predictions. Add to that asset prices change daily and plethora of information is dished on our table, we just can't keep track of how experts have fared. Warren Buffet said "Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway" Is all expert advise on financial investments garbage ? - No They are experts and they can read financial information and make sense of it, however as I noted above they have keep to making predictions to make sure trader keeps buying or selling so that brokers continue to make money. It is a vicious cycle.  There is a concept that quality of your predictions go down when you have make multiple predictions  in a limited time frame.  I took a sample of medium to long term predictions made by one of India's leading financial expert SP Tulsian on money control in first week of January 2014, this is how he has fared.

Hits 5/10 i.e 50% of the time the predictions were correct. The above graphs are not to point out any single person's ability to make correct calls. I have great respect for Mr Tulsian and the way he analyses opportunities. But it's tough to make correct calls every time for anyone leave alone for under pressure market experts. Where does this leave a retail investor like us ? If we act on above advise we would probably lose our money because we lack discipline to keep a strict stop loss. This brings us back to square one, we can't make decisions  nor we can't rely on experts. So how do we use expert advise ? I think we should to go to the next level details of the prediction and learn why experts think the way they think. I have two rules that I stick to when I do this analysis Rule 1 : Ignore purely calls with no reason or logic Rule 2: Ignore daily calls, they are too fast for me to act or even comprehend Now lets analyse Mr. Tulsian's ten predictions above, the following quotes are from Moneycontrol website followed by my commentary  

If you take the relative valuations theory, Reliance Communications has been languishing may be for last one and half month in the range of about Rs 130-135. Infact this kind of narrow range behaviour we have not seen in the stock.This kind of range bound behaviour was indicating that break out has to come because lot of accumulation has happened in the stock in the last one month or so." He further added, "Whenever you see the expiry happening and the new series coming in, generally the trend has been that if the stock has started with a bang it generally lasts till expiry. If it has remain subdued it must allow the expiry to get over to see the renewed vigour coming into that stock. So, probably that indication or that kind of behaviour now we are seeing again. I won't be surprised to see the share price breaking Rs 150 may be in this series or may be Rs 154, in fact that is the outer level which I will look for on the stock.

I don't understand relative valuation theory, also I have very limited knowledge of how stock prices behave near expiry nor I am able to make sense of above. I will give this one a pass

I am going long on Ranbaxy Laboratories . I have been keeping the positive view. Look for a level of Rs 465-466 with a stop loss of Rs 458. If somebody holds this for a week to ten days they can look to see a gain of about Rs 15-18 in the stock.

No logic or reason, I have to move on

On Wednesday UCO Bank moved up 7-8 percent, there was no reason for that. Now if you take a fundamental call it is ruling at a price-to-book of 0.7 which is equivalent to Bank of Baroda (BOB)

Now there is concept coming out here, the stock's price is technically stretching far too beyond its fundamentals valuations when compared to peers. This is only possible when the company is leaving behind peers in industry, Is is the case with UCO bank ? I don't know but good template to make trading calls.

If you really see the developments which have been happening I do not think Apollo Tyres can really move beyond Rs 120, because still there are lot of hangovers of the Cooper Tire. Probably they may initiate the damages claim on the company and all that, but still you do not have the fear of the downside as well.

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The company is expected to see an earning per share (EPS) close to Rs 20. There are some concerns like high debt. We have not been seeing the debt reduction happening in the company. The pace at which the market wanted to see, but market for the time being is over looking those things. If you take the expected EPS of Rs 20 for FY15, I am expecting better working for Q3 as well. So, taking all this factors, one can take a technical short-term call for a level of Rs 160 maybe in a week or so

Here the expert is forecasting earnings, since we have advantage of hindsight, lets check that -  The EPS was 3.64 for Dec'13, extrapolated to year it becomes 14.56 considering a 20% growth also it would have not met the predictions. Price do follow earnings.

The open interest rouse by about 11.5 lakh shares yesterday and open interest today were at 83 lakh shares. That means the position is building up gradually in the stock

Purely a call based on technical indicator called open interest, this prediction forced me to learn more about open interest as a technical indicator. If you want to read more open interest go here

All its projects seem to be on track, its debt is also not very alarming and at one time it used to be the Tata Power . People used to have lot of comfort prior to Mundra ultra mega power project came in because that used to be the blind call that if you want to go for a power generation company. That seems to be now happening with CESC, but apart from that it has been gradually moving and maybe a level of Rs 500 can be expected in next one month or so, but look for a level of about Rs 490 for the time being

The expert is commenting on long term health of the company,as debt levels go down the company gets to keep more portion of it's profit for its owners thereby making the stock attractive to other investors leading to rise in price. A very important concept to understand for trading.

Aban Offshore has caught the momentum in the last one month or so. We have been seeing the stock going up. It has been bought by either value buyer or maybe the long-term investors

Another technical pick, a momentum stock, trader should learn what are momentum stocks and how to identify them. I have written to identify momentum stocks using Darvas's theory you can read it here

I will not advise to remain invested in Gujarat NRE Coke for a very long time. One can look for a level of Rs 12.50 because you never know when the profit booking will start happening into the stock, so look for a level of Rs 12.50 and exit at those levels

I don't get a logic for this one did you ? Therefore it doesn't satisfy rule 1 - hence ignored

Two payments have been chalked out for Mahanagar Telephone Nigam (MTNL), one is the surrender of spectrum and second is the real estate monetisation. If the company has losses of Rs 4,000 crore every year largely going into the employee cost, I don’t think that one has future for that company. These are all the punts for traders.

A very informative call on fundamental health of company. It clearly states that if company can't repay and service its debt from what it earns stock prices are bound to go down. Another fundamental based call. To sum up a long post - am sure you are two coffees down :) 1.Learn why the expert is making that call, stick to both the rules above to filter 2. Analyze the logic and learn about the concept which expert has used 3. Record your understanding in your trading journal 4. If happy act on advise Leave a comment to discuss, Subscribe for more fantastic stuff in your inbox. Happy to have published my first book, please share with your friends who are doing CFA. Cheers