Monday, January 26, 2009

Needed: Research Risk Ratings

As watchers of the Australian Open tennis know, January 26 is Australia Day. (At this writing, it's already January 27th down under; the celebrants are presumably back at work.) Seemed like a good time to visit the Aussie version of Yahoo finance, from whence comes this column by stockbroker Marcus Padley, calling for a new sort of risk ratings:
CEOs don't understand their own companies, so how can an analyst with limited time and selective exposure to the company do any better.

The last year has taught us that we will never know everything about some companies let alone be able to predict their futures. It has also made it clear that we have been making a heck of a lot of more assumptions and taking a heck of a lot more risk in the investment game than we knew.

We complain that the broker research has served us badly, especially in the last year, but as unimaginable disasters unfold it is becoming clear why. Because researchers have no chance. Large complex companies don't even know what they're doing so no manner of "in depth" research is ever going to be better than a best guess. The inadequacy of research is excusable because it is understandable and inevitable. What has cost us is our assumption that some of it is more credible than it is.


What we need is a Research Risk Rating (RRR) for each stock.
An investment bank for instance would have a "High" RRR. It is almost impossible to know what they are doing.

Photo via Wikimedia Commons

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