Most people believe that brokers' research notes are self serving and biased. But if you use them wisely, they can be a brilliant tool to help your stock-picking. Bengt Saelensminde explains how.
Those research notes that brokers send out are self-serving and biased. They publish them just to generate trading commissions in 'house stocks'. And those stocks rarely perform.
Or that's what most people I talk to believe. And in fact, academic studies seem to back them up. They mostly conclude that brokers' tips are no more likely to outperform the market than a chimp throwing darts at the FT stock listings.
But hang on a minute: I think people are missing a trick. There's hidden gold in many a broker report. That's all the information that's been carefully extracted from company accounts by City analysts.
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I'm forever thumbing through brokers' reports. It doesn't matter whether I'm by the pool on holiday, or at my desk in town. If there's a report to hand, I'll swallow it up.
Today I want to show you how research notes can be a brilliant tool to help your stock-picking.
Have you really got time to do all this work yourself?
Let me make one thing clear from the start: I don't put much store by broker recommendations. It's their research that interests me.
There's no way you can become a master of every sector in the stock market. Sure, you can get to grips with a couple, but not even professional analysts try to take on more than that.
So what do you do if you want to put together a diversified portfolio of stocks? How can you make an informed decision on stocks from loads of different sectors?
Here's what I do: I use the research from top analysts to get primary data. I use their reports to help me decide which stocks look good to me. There's no need to go along with what the analyst is tipping.
Research notes can give you an invaluable industry guide. If you take a sector report, there will be tables with data including key ratios that have been diligently extracted from countless company accounts.
The analysts may not be at the top of the pile of City grandees. But believe me, they're well paid professionals that are worth listening to. They've got reputations and won't risk sullying them by producing 'tosh'.
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All this research takes time and resources to put together. Yet many write it off just because of the conclusions the broker makes. This is a mistake.
Get the story and then make up your own ending
In my experience, analysts put too much emphasis on profits. Not enough thought goes into the downside risks of these profits not being achieved. That's why they often end up with duds.
I tend to put a lot more emphasis on gearing (operational as well as financial), diversity of earnings and cash-flow than most analysts bother with.
So when it comes to the 'sector pick', I'll rarely come up with the same conclusion as the author. It's a bit like baking a cake.The research is like the recipe, but you're free to alter it to your own tastes. So if you don't like so much chocolate in the mix, then go ahead, and just take it out.
If you want to mark-down a company because it's got too much debt, too many intangible assets, or simply too much emphasis on one product, then that's your choice.
Try not to get sucked in by the analyst's argument. Stick to the facts and figures and you've got an invaluable source of information. Remember, it's your cake!
Getting hold of these wonder-documents
These reports aren't always easy for the general public to get hold of. Like I say, they're expensive to produce and tend to stay 'in the family'.
But if you know somebody in the industry with access to this sort of research, then ask them if they can copy you in. The main brokers tend to pass reports between their fraternity. So if you can get on the list, you'll be able to get your hands on loads of great information.
Or perhaps you've got a friendly stockbroker. They may be happy to put you on a mailing list; it costs you nothing to ask.
I've also seen some financial websites offering free broker reports to download. So have a hunt around and see what you find.
This article was first published on the 22nd September in the free investment email The Right side.Sign up to TheRightSide here.
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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.
He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.
Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.
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