So in your latest meeting with your financial advisor he has recommended a pharmaceutical stock which he feels has the potential to create tremendous wealth over the next 8-10 years. His suggestion is to just invest and forget about it. To buttress his point, the financial advisor has also given you a copy of a research report prepared by a high profile analyst from one of the premium true-blue FIIs in India. Should you take the analyst report at face value? Obviously, as a discerning investor you should not! Then what are the questions to ask your financial advisor about your portfolio. What are some questions to ask your financial advisor about the specifics of the research report? What could be the best 5 or 6 questions for your financial advisor which will help you pinpoint the key issues pertaining to the research report? Here are 6 such critical questions you can ask you advisor..
1. Is there a clear downgrade / upgrade and what are the risks to your viewpoint?
Every research report must have a key action point and you need to understand that action point. You need to be clear with your financial advisor as to the intent of the analyst in this case. Is the analyst only upgrading the stock or he has upgraded many more stocks with a similar profile? In that case what is the logic for selecting this stock only? Even assuming that the analyst is justified in his analysis, you need to understand what are the risks that this stock could create to your portfolio and to your overall financial plan? Check with your financial advisor if this is merely an expression of opinion or a clear buy recommendation.
2. What are the financial and non-financial justifications and the assumptions
Having understood the underlying theme of the report, the next step is to understand the underlying assumptions and the justifications. Here are a few questions. Is the analyst’s projection for the sector in tune with what other analysts are projecting? You also need to check with your financial advisor as to what are the specific tangible and intangible benefits that the analyst sees in the particular stock. Every price opinion must have a solid justification based on reasonable assumptions. That is you what you need to be clear on.
3. How different is the price from consensus and what is the margin of safety
The third aspect you need to understand is the gap between the valuation that the analyst is projecting and the actual price of the stock. If the gap is just about 10-15% then there is no great idea in chasing the stock. You need a clear margin of safety where the stock in question is quoting substantially lower than the perceived value of the stock. Only then there is a margin of safety that will justify buying the stock. After all, as an investor the research report has to be actionable for you and make sense to your portfolio mix.
4. Has the view been validated through secondary sources and how
This is an extremely important question that you need to ask your financial advisor about the quality of the report. As an investor you are entitled to be a sceptic. That means you must ask the right questions and you must ask probing questions. Check if the analyst view is actually in tune with reality. What are the primary and secondary sources of data that the analyst has considered? Has he spoken to industry experts, dealers, wholesalers and retailers? Has the analyst considered the viewpoint of stockists, regulators and competitors about the perceived risks? Only then the report actually becomes credible.
5. Is there any conflict of interest in your call and the disclosures
This is a very delicate but very important question. Quite often there are conflicts of interest in any recommendations. For example, the analyst may have recommended the stock but an arm of the broker may be having an investment relationship with the company. Alternatively, a group company may be doing consultancy work for the target company. The investment and proprietary arm of the broker may have already accumulated the stock in their books in advance. While research reports do contain disclaimers, they are more of safe harbour provisions to be legally clear. As an investor, you need to ask these probing questions from your financial advisor.
6. Finally, how does this stock fit into my portfolio in terms of risk and return?
That is the bottom line and the proof of the pudding lies in its eating. However great a stock it may be, it needs to fit into your overall financial plan. If it is an IT stock and you are already overexposed to IT then the stock does not add much value. Secondly, if the stock has a risk profile that does not suit yours then again the stock is of no use to you. The idea is to ensure that the stock must fit into your portfolio both in terms of risk and return.
The onus is on you to probe your financial advisor. As your advisor and portfolio manager, he is likely to bring a plethora of fresh ideas to the table. You need to pass them through this 6-point test before taking your call.