Dealing with advice
Some investors rely heavily on analysts' advice in the media when making their investment decisions, while others may just take it lightly. How, then, should one deal with investment recommendations?
Sometimes, investors may heed recommendations made in an investment research report based merely on the part of the report that is extracted and printed in a newspaper. This may not be sensible. Due to space constraints, it is not possible for the media to include all the essential information. You may not, therefore, have access to the underlying assumptions that led to the conclusion, or any disclosure made by the intermediary and/or analyst concerning their holdings of the stock, or their relationship with the listed company being researched.
Similarly, given the time constraints, an analyst speaking on TV or radio programmes often cannot go into detail about the assumptions that support his answers. So you should not make any hasty investment decisions relying solely on his advice.
When reading research reports, do not merely take investment recommendations at face value. The key is the logic and analysis behind the recommendations, rather than the recommendations themselves. Recommendations can be very subjective and influenced by the analytical tools used. Should the underlying assumptions fail to hold, the recommendations may no longer be valid.
You should also bear in mind that recommendations in a research report are not tailor-made for you. The analyst has not taken into account your unique financial circumstances, such as your financial situation and risk appetite. You must, therefore, analyse and evaluate whether the recommendations suit you.
The purpose of the SFC's rules and regulations is to increase the transparency of licensed intermediaries and analysts in issuing research reports and giving stock recommendations, specifically in order to minimise conflicts of interest. However, no regulation can guarantee the quality of an analyst's investment recommendations. You should only take such recommendations as a reference and always remember to consider your personal circumstances before investing.