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Tisha Malhotra made post

How do I interpret when a broker talks about their research success ratio?

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2 years ago

There are 3 basic things you need to remember when you see the success percentage put out by any broker. Firstly, percentage success is not the same as percentage returns and that difference is very significant. Most investors tend to confuse these two. Percent success is largely an academic measure. You gave 10 calls and got 8 right so success is 80%. That sounds simple but hardly means any things. There are lot of additional considerations like time to act, liquidity, exit advisory, market volatility etc. Percent return also calls for identifying stocks, holding on to winners, sticking to the liquid space and considering trading and executions costs.

Secondly, returns are only one side of the story; the other side is risk. Don’t ignore the risk aspect. Most people forget to consider the risk per unit of return. A simple example! A 10% return on Sun Pharma is more valuable than a 10% return on Bhushan Steel. It has been generated on a lower risk per unit of return. Success of 70% on liquid Nifty or Sensex stocks is more valuable than a 90% success ratio on highly volatile stocks with dubious credentials.

What you achieved yesterday speaks of what you can achieve tomorrow because the past is rarely a good guide to the future. Let us give the benefit of doubt to the success percent. It is still historical and not predictive. An analyst with an 80% success this year need not repeat the performance next year. A better way to look at this number will be look at success consistency over a longer period of time. That is still more reliable relatively. Focus on strategy more than return percentages. Remember, the famous stock market wisdom that, “The stock market is full of people who know the price of everything, but know the value of nothing”.