The price of investment advice

Investment advice can be expensive - for the giver and the taker alike.

By C. R. L. Narasimhan

What is the price of investment advice? Investors in stock market instruments everywhere must have read a flurry of bad news linking bad investment decisions to wrong advice given. Being short-changed by your expert broker or investment analyst is a common enough experience in good or bad times. But today in India, there is a certain topicality and a negative connotation. Consider the following:

(1) The world's leading brokerages and investment firms including top names such as Merrill Lynch, Morgan Stanley, W. I. Carr and several others through their offices in India have badly misread the stock market, especially during the tech-boom period. Specifically, their forecasts of specific stock prices such as those of Zee, Himachal Futuristic and others were way off the mark. A few of the stocks they recommended at a given price range underperformed badly.

(2) More seriously, the bullish recommendation by the country's two leading merchant bankers SBI Caps and UTI Capital Market Services on Cyberspace has by now become highly controversial. Their expert reports recommending investment in Cyberspace are the subject of criminal investigations, forming part of the larger CBI case against the erstwhile UTI's top management. Did UTI, GIC and others actually rely upon such advice?

(3) Mutual funds of all hues fared miserably by misjudging the tech boom. In relation to the stock market indices, even the balanced funds have underperformed. In the case of mutual funds it is not that they just advise. They also put their unit holders' money in areas they were confident about.

(4) It is not all negative news for those who advise or give tips on the stock market. UTI's own equity research cell had not approved of the Cyberspace investment. The Trust landed in serious trouble by not heeding its internal advice.

Each of the above needs to be understood in the proper perspective. Advice, especially investment advice has, traditionally been given free in this country. The growing stock market culture since the 1980s has spawned a huge investor awareness of the potential. Although there have been many give tips on particular stocks and undertake other ``investor friendly" activities, the present day categories of investment analysts and stock market experts are clearly in a different league. Individual investors do expect quality advice but it is not known how many rely exclusively on specific advice.

Anyway, the tech boom and its early collapse has seriously exposed the limitations of investment analysis, even in its present far more sophisticated form. There is certainly a loss of credibility. When the likes of Morgan Stanley go the whole hog for scrips like Zee even when it was trading at a high Rs. 1,330 plus (in March 2000) something is amiss. And not necessarily because that scrip is now trading in the region of Rs. 91-92.

Or take HFCL, another sensational loser in the wake of the tech boom. Top brokerages put out a buy advice in March last year when it was trading around Rs. 2,300. They confidently predicted that the HFCL scrip will appreciate to Rs. 3,500 or more in about six months. Today, HFCL is trading around Rs. 56-57.

There are many other instances to show that even acknowledged experts can go terribly wrong in the Indian market.

A few caveats

Mutual funds have lost out in another way too. The shrinking net asset values (NAVs) of a majority of their equity based schemes demonstrate how badly they have been taken in with their own advice. But to the general inference as to the fallibility of experts a few caveats are in order. One, it is certain that even before last year's boom and bust tech cycle there were several investment tips that went wrong. Nor by any means has the wrong advice been confined to the so called new economy stocks. In fact, for a long long time, ordinary or non-serious investors treated investment advising newsletters as junk mail. The tech boom did create an increased awareness in investing but in the end also exposed the limitations of even mainline investment analysis.

Two, the tech melt down has its impact more severely on the Nasdaq and other exchanges than in India. Indian investors, analysts and even financial intermediaries did not have to cope with problems peculiar to the developed world.

For example, understanding the ``business model" of dotcoms. To the extent software scrips rather than those of dotcoms (or other scrips with inscrutable valuations) dominate the Indian stock market's valuation of tech stocks ,Indian investors have been saved (to a degree) from the vagaries which, say, the Nasdaq investors faced.

Yet the positioning of the ICE scrips as the trend setters to the Indian market has created its own problems. Note how sharply media scrips and some other tech scrips belonging to questionable managements have fluctuated.

Three, the tech boom did create an urge to go for tech scrips, at all costs, often ignoring commonsense. The logic ``that if you are not in it you have failed" seems to have motivated most large funds. Certainly the US-64 has paid a very heavy price for its tech stock bias but most others too bet wrongly.

Outside of mutual funds and portfolio managers, merchant bankers are probably realising the need for circumspection in giving advice. The Cyberspace issue will not go away soon. Casual investors, used to receiving unsolicited newsletters, will no doubt be more careful.

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