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Sunday, February 1, 2009

How to use Financial News

Corporate financial news is flowing thick and fast in the midst of Q3 '09 results season. Business channels and financial news media are busy reporting investment frauds, earnings downgrades, revised stock price targets, lower personal loan rates and mutual fund redemptions.

What should a small investor do with this information overload? How does one separate the wheat from the chaff? Which bit of financial news is important and can be used to one's benefit? What news can be discarded?

The answers lie in categorising each bit of news into one of four types - good, great, bad and worse.

Good news and bad news tend to have short term impact on market sentiment. Any effect on index levels and stock prices is typically limited to two or three days at most.

Great news and worse news have longer lasting impact on index levels, and more particularly on stock or fund prices.

So how does one categorise financial news? Here are some examples that may enable small investors to take informed buy/sell/hold decisions.

Good news is when a company meets earnings expectations and maintains dividend during down turns, or exceeds expectations and increases dividends when the market is more conducive. News of receiving a large new order from an existing or new client is also good.

What is great news? It is news about some fundamental change in strategy or management that will have long-lasting favourable impact on corporate performance. L&T divesting its slow-moving cement business to Grasim a few years back was great news. A family owned business muddling along - like Zandu Pharma - joining hands with a more aggressive Emami is great news.

Bad news is a company missing earnings expectations and lowering dividend. Suzlon losing an export order because of technical problems in its rotor blades is bad news. A successful fund manager like Mihir Vora leaving HSBC Asset Management is also bad news.

Worse news is when a respected head of a successful company declares that he has been siphoning off funds for the past several years to satisfy his personal ambitions. (Lessons you can learn from the Satyam fraud were discussed in this post.)

Any short term up swing due to good news can be used to sell the stock; short term down swings due to bad news may provide an entry point.

It is slightly more difficult, and requires experience, to benefit from great news and worse news. The initial market reaction to either type of news is similar to good news or bad news. But a second, and more longer term, re-rating of the stock happens some time later after the market digests the news fully.

If you are able to recognise great news from good news, hold off the selling and buy into the dip that follows. If you recognise worse news from bad news, wait for the initial sell off to end and buy for short term profits, or sell into the next rise.

Many investors bought Satyam when it moved below Rs 100, only to see the price go down to Rs 10. A few bravehearts bought at Rs 20 and exited at Rs 50 for a tidy short term gain.

For long term investors, trading on good or bad news may not make much sense. But being able to recognise between good and great news (or bad and worse news) may considerably increase your ability to time entry and exit points.

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