Why One Cannot Create Wealth Just By Getting Stock Market Recommendations?

6 Jun 2019by Research and Ranking

Why One Cannot Create Wealth Just By Getting Stock Market Recommendations?

Are stock market recommendations really the best way to make money from stock markets?

Well not really. But many investors strongly believe the best way to make money from stock market is by investing on the basis of stock market recommendations.

However, beware not all stock market recommendations are genuine or accurate or backed by detailed research and analysis. Some stock market recommendations which you receive an email or SMS recommendations may even be sent with vested interests.

So when it comes to stock market recommendations one has to tread with caution, especially with regards to the source of the information. Remember ‘All that glitters is not gold’.

By any chance have you heard of Leel Electricals? Just 2 years back it was a hot investment stock suggested by many stock market recommendations

Just in case you haven’t heard about it Leel Electricals is an electrical component manufacturer which sold of its consumer business and Lloyds brand to Havells for Rs 1,600 crores in 2017.  As a result, the company recorded an exceptional gain of Rs 946 Crore in the September 2017 quarter to account for profit on the stake sale. This is what probably made it a hot investment stock suggested by many stock market recommendations. As a result many retail investors, who saw it as a value buy invested in the stock.

So while the stock market recommendations were right about financial ratios and company’s future prospects they overlooked a crucial factor that management of Leel Electricals had deliberately fudged the balance sheets of the company.

According to a report by the Economic Times, the new management which took charge after the demise of the company’s CMD, reversed the gains to the tune of Rs.310 crores in the subsequent March quarter citing associated costs and expenses. The company also allegedly diverted huge amounts to other businesses of the promoter as capital expenditure and loans for buying land and factories of their own plants.

So it was a clear case of misappropriation of funds which led the stock to fall from a 52 week high of Rs.250.90 to 17.60 eroding the wealth of investors.

So you see most stock market recommendations do not consider the whole picture. Consider it like a tip of the iceberg where only 10% of the iceberg is visible on the surface whereas 90% of the iceberg lies submerged beneath the surface of the ocean. Unless backed by detailed research stock market recommendations are useless for wealth creation.

Because apart from the right time to enter a stock, it is also important to know when to exit a stock.  There are have been numerous cases in the past when ratings of good stocks have changed from ‘Buy’ or ‘Hold’ to ‘Sell’ due to factors like a sudden change in regulations. In such times it is imperative to exit a stock.

That is why one cannot create wealth just by getting stock market recommendations.

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