Here are some extracts from research reports I have gleaned over the last few days:

“We expect the government to continue pump priming into 2008″

“While CPO prices continue to break new records, above RM3,400/t presently, our concern is that earnings could peak this year.”

“Election stocks may see some selling pressure”

“According to a poll conducted by a local daily, Malaysian voters are most concerned about the cost of living, social issues, the crime rate and illegal immigrants.”

What do they all have in common?

These statements are all unquantifiable. And they do not deal in facts. Only opinion. I would not buy stocks based on opinion anymore than I would buy a television or car just because the salesguy in the shop thinks is good.

It’s important to understand that research reports are published by brokers and banks, whose only source of income lies in providing banking or broking services to their clients. Put simply, the more a client trades, the more money a broker or bank makes. Also, hedge funds and institutional clients have fairly short horizons because they have to compete with one another and report their performance monthly or even daily to attract investor attention.

Whilst I do not believe that research is published solely to encourage investors to trade, the client-centric focus of brokers and banks necessarily means that they have to pander to shorter term investors, which is why the majority of reports contemplate issues and news which are only relevant in the next 6 - 12 months. Therefore it is no surprise that research reports are all focusing on construction, election and commodity plays.

The problem with this is that it creates a herd effect as the majority of investors will base their investment decisions on the same criteria. Worse, analysts also get comfort from the masses in that if everyone recommends palm oil IOI corp, then the research analyst who also does so will not suffer as much rebuke if the price of the stock tanks, compared to if he or she went out on a limb and recommended a small unknown company manufacturing electronics, for example.

And going back to my original point, an investor should have very clear criteria based on what he will buy and sell, whether it be a car, television, property or shares.

So firstly I don’t think that anyone can predict where commodity prices will be at the end of 2008 with any certainty, or whether the government’s pump priming (which, incidentally, is something that the government has always been doing as long as it has been around) will benefit a particular company - after all who cares whether a company gets its projects from the government or from another organisation or as a sub-contract?

And would it matter where in the election cycle we would be or where commodity prices are? If a company has good assets capable of generating quality cashflow for a long period of time, can organise its internal structure and debts well enough to make good profits and is valued cheaply, then would that not be the safest place for your money compared to all other types of companies?