03. MilkorWater Methodology

Where Can I Find MilkorWater-Recommended Best Stocks?

MilkorWater does not make any financial investment suggestions or recommendations.

Users of the site are expected to arrive at investment decisions on their own. We know it's a tough call, and it is our goal to help retail investors develop a better understanding of the public financial markets and develop their own intuitions.

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What's Inside An Analyst "Recommendation" Or "Stock Rating" Or "Market Call"?

An Analyst Stock Recommendation is a very brief statement, and usually accompanied by supporting data and analysis in a research report. The key ingredients of a recommendation (or, "market call") are:

  • investor call to action such as Buy/Sell/Hold.
  • Target Date or investment horizon.
  • predicted Target Price or ROI.

Drop one of these and a recommendation cannot be tested; therefore at MilkorWater we focus solely on those recommendations that can be tested.

Example: Analyst ABC from firm XYZ issues a 12-month BUY rating on Company PQR with target price XXX. Below is its breakdown.

Recommendation Date and Price: This is the initial benchmark for that recommendation.

Investor Call To Action: A "Buy" (or strong buy, accumulate, outperform) recommendation is simply a call to buy and hold the stock over the recommendation's life.

A "Hold" (or, neutral) recommendation means hanging on to the stock if the investor already has it, and not jumping into it if not already in portfolio.

A "Sell" (or strong sell, reduce, underperform) recommendation can also mean one of two things: if the investor already owns it, then sell; and if doesn't already own it, possibly profit from the recommendation via short selling (see FAQ: What Is Short Selling). Quite obviously, short selling is not fit for everybody.

Words such as "strong" only serve to indicate an analyst's confidence in their rating.

Target Duration (Horizon): This is the holding period for the investment implied in the original recommendation and can be worked out to a date in future. As time passes, note that the remaining Target Duration of the recommendation keeps on shrinking, and the ROI projection should be adjusted to reflect the shorter period.

Implied or Expected ROI: This is what an investor who is acting on the recommendation can expect to gain (or lose!) if the analyst price prediction were to come true.

See Also: FINRA Guide to Understanding Securities Analyst Recommendations

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What Is The "Implied or Expected ROI" Of A Recommendation? What Is Its "Realized ROI"?

MilkorWater re-assesses all analyst recommendations every trading day. (see also FAQ: What's Inside An Analyst "Recommendation" Or A "Market Call")

The Realized ROI measures the profitability of the recommendation had one acted on the recommendation as soon as it was issued.

The Implied ROI measures the profitability of the recommendation is an investor acts on it now and the recommendation's Target Price is reached on the Target Date.

These ROIs are not annualized. See FAQ: How Is ROI (Return On Investment) Calculated?

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If Implied ROI Is Only For Target Duration Then How Does MilkorWater Compare Recommendations With Different Time Horizons?

Although MilkorWater generally shows the un-annualized Implied ROI for a recommendation, when comparing different recommendation, we internally annualize them before making comparisons. Just as you would have expected.

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Why Does MilkorWater Track All Analyst Recommendations?

At MilkorWater we have adopted a very plain attitude – a professional analyst must be held accountable for all of his or her recommendations because they are, well, professionals. Investors make a portfolio include/exclude decision on a stock on basis of Projected ROI from these recommendations and this is but a natural expectation from investor community. But why?

We all have heard of the virtues of "underproject-and-overachieve", and also of the pitfalls of "overprojecting". When it comes to making an investment decision, we at MilkorWater consider neither to be investor friendly. What we want is a game played with a straight bat. No curve balls, please.

One important ramification of an "underproject-and-overachieve " analyst style is that investors may unfortunately exclude some excellent stocks picks from their portfolios because the original Implied ROI did not appear very good at the time the recommendation was made. Or, sell out too early. By the time the analyst updates the Target Price in their recommendations, it might be somewhat late to jump in.

We all intuitively understand the effects of an "overprojecting" kind of advice, right?

At MilkorWater we therefore track all recommendations from a professional analyst as we believe an investor can take a decision only on basis of what is known of the recommendation at the time the recommendation is being evaluated.

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Does MilkorWater Track All Analyst Recommendations?

We tend to follow two rules of thumb.

One, we do not focus on very short-term recommendations, for example same-day or just a few weeks. We feel these are more for very active investors.

Two, we only take recommendations that meet our 5-point of testability criteria. (see FAQ: How Does MilkorWater Assess A Recommendation).

Example: Analyst ABC issues a BUY rating on a stock with no clear guidance on Implied ROI or Target Duration. It cannot be tested, so we exclude it.

Example: Analyst DEF issues a 15 day trading recommendation on a stock. It is too short a time horizon, so we exclude it.

That said, despite our best efforts we do sometimes miss to capture a recommendation. (Do please drop us a line on the feedback channel when you observe that.)

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How Does MilkorWater Assess A Recommendation?

An analyst recommendation is assessed every day the stock trades, and then one last time on its Target Date. (see also FAQ: What's Inside An Analyst "Recommendation" Or A "Market Call")

The recommendations are tracked on an ongoing basis for the ROI generated or realized so far and the ROI Implied for the future. We also track if the Target Price projected by the recommendation has been successfully realized via market action (once realized, it's good as gold.)

At the conclusion of the recommendation's Target Duration, it receives a final assessment on some key criteria – ROI generation, riskiness of the generated ROI, analyst's predictive accuracy, and the investor capital risked.

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How Does MilkorWater Assess An Analyst Performance?

MilkorWater assesses an analyst throughout its lifecycle. (see also FAQ: What's Inside An Analyst "Recommendation" Or A "Market Call")

We assess the analyst on his or her cumulative track record of recommendations that have crossed their Target Dates. Mirroring recommendation assessment, an analyst too is assessed on the same key four factors (see FAQ: How Does MilkorWater Assess A Recommendation) namely accuracy of predictions, meeting or missing their targets, ROI generated and risk-adjusted performance measured via Sharpe Ratio. (We are continuously tweaking these criteria in our research lab. But if we change the criteria, rest assured all recommendations will receive the same treatment.)

As every investor is uniquely situated in their circumstances and investment goals, at MilkorWater we never label an analyst a success or a failure. This task has been purposely left for the investor...

In fairness to the analysts, we assess the analyst on basis of all available track record of an analyst. From our users' perspective, we give higher importance to the analysts' more recent performances.

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What Parameters MilkorWater Uses To Rank Analysts?

MilkorWater uses four primary inputs: accuracy of meeting target price, opportunity to realize target price, Sharpe Ratio, and ROI generated (annualized). See also FAQ: How Does MilkorWater Assess A Recommendation

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How To Interpret Strong Buy, Buy, Hold, Sell, Strong Sell Terms In An Analyst Recommendation?

Strong Buy and Buy (also, Accumulate, Outperform) generally translate into "buy" action. Adjectives such as "Strong" reflect analyst's level of conviction, projected ROI, or both.

Strong Sell and Sell translate into "sell" action (also, Reduce, Underperform). An investor can also Short Sell (see FAQ: What Is Short Selling although, as already noted that's not for the faint of heart) depending on technical feasibility and their own capacity for risk.

Hold roughly translates into taking no action. If the investor has it in their portfolio, the advice is to "stay put". If not, then "hold off". There is no fixed meaning to "Hold".

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How Important Is The Date Of Recommendation In An Analyst Report?

The Recommendation Date is a key input into calculating a recommendation's Realized ROI and its overall assessment.

For an investor who is evaluating a recommendation at a date after the recommendation was issued, the important factor to consider is its Projected ROI.

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Why Is Analyst Ranking Important And How Will It Improve My Odds Of Success?

Many believe that a successful analyst will have the foresight to "see around the corners" and make recommendations that work out well for their followers. At MilkorWater we therefore track analyst performance for sustainable positive performance.

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Why Is Analyst Ranking Important And How Will It Help Me Reach An Investment Decision?

It may be difficult for an average investor to fully grasp an analyst's research report, and then to also track the market and news on a 24x7 basis. So they may opt to using the summary recommendation from an analyst. For this to be a successful strategy, they need to identify analysts they feel are delivering superior results.

Even for a single stock, there might be multiple recommendations from different analysts on any given day – sometimes strongly conflicting with their peers. So, which analyst should one follow?

There is ongoing research on this topic. Academic research points out that there is significant persistence in analyst performance. Think of a batsman being "in form". So one wants to identify form as well as fitness.

At MilkorWater, we therefore assess analysts for consistency and sustainability of their performance so that – on the whole – one can use this to generate some top quality investment ideas that one can develop themselves, if not trusting the analyst entirely.

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Which Stock Exchanges Are Covered By MilkorWater?

MilkorWater covers all NSE (India) stocks. NSE is the largest in India and the third largest in the world in terms of transactions volume.

See also: National Stock Exchange of India Ltd (NSE)Investor page, FAQ

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What Is The Base Year For MilkorWater Sector And Industry Indexes?

A base year is the year used for comparison for the level of a particular market index. The arbitrary level of 100 is selected so that percentage changes can be seen easily without having to use a calculator. At MilkorWater, Sector and Industry indices base year is 2010 (base=100.00)

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