Thursday, July 23, 2009

Can You Trust Your Sources?

There's a plethora of information available to investors from brokers, analysts, the mainstream media, and financial bloggers. But there are conflicts of interest abound in this industry, resulting in the fact that you cannot trust anyone but yourself.

This became abundantly clear to me recently as I was approached by more than one agent presumably looking for exposure for their respective clients: the agents were offering to pay me to write about certain small companies. By itself, this is not such a bad thing. The small companies would get exposure, the readers would get my thoughts on a stock (presumably one of the reasons they read this site), and I would receive consideration. Everybody wins, right? Well, only if certain rules are followed.

But when I presented these rules (e.g. my opinion would be expressed rather than simply a favourable recommendation, the payment would be made upfront so as not to influence my opinion of the stock, the payment would be set ahead of time only rather than a bonus based on the stock's performance, the fact that I'm being compensated would be disclosed) the agents quickly declined and moved on. But that doesn't mean they disappeared; it likely means they searched, and perhaps found, another conduit for their message.

Unfortunately, this means that you should assume that everything you read is biased, because you don't know when you're getting an independent opinion and when you're not. The antidote to falling prey to this unscrupulous behaviour is to treat the information you read as a starting point, not a complete analysis. Investors must do their own research by reading the company's disclosures; only then can their conclusions be trusted. Do your homework!


Joe said...

should the source matter? as long as you know how the market will react before the reaction, shouldn't this be the imperative - rather than whether the information is right or wrong? isn't the value of information derived from perception rather than correctness?

Saj Karsan said...

Hi Joe,

Maybe if you're a trader, that line of thinking makes sense. Since this site is geared towards value investing, however, we're interested in being right, since we believe that's what leads to investing success in the long run.

Joe said...

haha of course! if only I had read some more of your articles before i posted! your site is a rich information experience, and you really have a knack for explaining things. it amazes me how few people have subscribed. really feels like i've stumbled upon a gem, and I look forward to reading your future posts !

Saj Karsan said...

Thanks for the kind words, Joe!