Manipulated equity research reports

Do not trust the muck that goes around as equity research on small stocks as most of them are factually inaccurate and "prepared" with questionable intentions.

A bull market invariably sees the mushrooming of research analysts. Anyone, including your neighbourhood grocery shop owner seems to display a savvy analytical ability. There is no regulation or guideline by market watchdogs like SEBI covering equity research. Fundamental analysts, technical analysts and a new breed called techno-fundamental analysts are at hand to dispense advice to anyone willing to listen to thwem. During a bull run when stocks are the flavour of the season, the media also gives them a ready.

As most of the visible and heard of stocks appreciate substantially, everyone searches for new ideas. Once stories dry up in frontline stocks, one way out for an analyst is to stretch an old idea. The concept of replacement value proposed by the late Harshad Mehta is a classic example of stretching an old idea.

When many of his favourite stocks had run up substantially and people had begun started questioning their valuations, Mehta came up with replacement value as a method of choosing scrips. He said his favourite stocks had to go up further as setting up new companies with similar capacities would cost much more than the market values of the existing companies.

This and similar ideas sound logical to many small investors, especially when they come from supposedly knowledgeable analysts. If the investors think for themselves, they would realise that existing companies would have old depreciated assets, low in efficiency and value, and it is not the assets per se but the return generated on those assets that matter.

Stretching an old idea is not easy anymore as there are large investment houses, both domestic and foreign, who cover the frontline stocks with detailed first hand research. Though big research houses are not infallible, they are more careful not to repeat the excesses of the dot com days when websites were valued on strange and exotic parameters.