Why It's Important to Do Your Own Research

Following ideas without research will likely lead to losses

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Sep 09, 2022
Summary
  • Hedge fund ideas can be a source of profit.
  • However, profit is not guaranteed with any stock.
  • Investors need to do their own research.
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This week, Asia-focused hedge fund managers participated in the Sohn Hong Kong investment conference. For those who have not heard about Sohn, the organization's conferences, which are held in London, New York and Hong Kong every year, are some of the most significant events of the annual hedge fund calendar.

Some very high-profile and successful investment ideas have been put forward at these events. Some have moved markets in the past. However, just like with all investing ideas, not all of the ideas put forward at this conference turned out to be successful, highlighting why it is important for investors do do their own research.

Blindly following the trades of others does not always work

Last year, fund managers highlighted a number of high-profile tech stocks and companies that appeared to be on the verge of explosive growth.

For example, Sixteenth Street Capital’s Rashmi Kwatra touted Sea Ltd (SE, Financial), Southeast Asia’s largest tech company. Marshall Wace’s Amit Rajpal vouched for Japanese digital finance firm Monex Group Inc. (TSE:8698, Financial), while Keita Arisawa at Seiga Asset Management picked QD Laser Inc. (TSE:6613, Financial), a Japanese eyewear maker.

But all of these bets have struggled over the past 12 months. Shares in Sea Ltd are off 76% since the conference last year. QD Laser is off 65%, Monex Group has declined 36% and another pick, Park24 (TSX:4666), has slumped 14%.

Of all the investments presented at that conference last year, only two have eked out a positive return, mainly because of the general stock market downturn, which has been especially bad for tech growth stocks in light of rising interest rates and recession risks.

These are supposed to be some of the most brightest minds in the financial industry, presenting ideas at one of the most prestigious conferences on the hedge fund calendar. So, where did they go wrong? Why didn't they predict the tech stock selloff? I would argue that none of these firms really went wrong. I’d argue that we’re looking at the wrong data.

Performance figures are misleading

Taking the performance figures of these positions over the past 12 months and saying that hedge funds made a mistake is really quite lazy. These investors highlighted the positions at the conference because they believed they were the best investments on the market at the time. But the market outlook has changed significantly over the past 12 months, and it seems likely that many of these investors will have changed their opinions on these businesses over the period, at least in regards to their short-term investment potential.

They may have liked them at this time last year, but that doesn’t necessarily mean they like them just as much today. In fact, they could’ve changed their opinions on the companies at any point in the past 12 months.

They might not have even owned the stocks at the end of last year, instead just admiring their long-term growth potential while selling out due to the impending market selloff. This is a big problem with following hedge fund advice and tips. If we are not doing our own research, we cannot adapt to different working environments and change to evolving situations.

Buying a stock just because it has been recommended by a hedge fund is a bad idea not only because by the time retail investors hear about it, the situation may have changed, but also because it shows a lack of committment to research.

Even if investors read and analyze hedge fund reports and ideas, they will not be privy to the same amount of information as hedge funds themselves compile. Moreover, no fund will ever tell us before they buy or sell a stock; we only find out after the fact, which can throw off essential market timing.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure