Wednesday, November 28, 2012

INSIDE INFORMATION OR GOOD RESEARCH METHODS...

Grab the phone.  You grab the other phone.  You get that one.  Syntex collapsed 50% in a short period of time due to rumors of cancer being caused by their birth control pill.  On the phone was three doctors.  How many of your patients are getting cancer we asked.  All three doctors didn't seem to know what we were talking about since none of their patients were getting cancer.  They further stated they were just doing some preliminary tests and if there are crazy rumors circulating, they didn't know anything about it.

Our brokers had been recommending Syntex to clients.  We were in a state of shock as the stock collapsed and we put out the word "It seems that the Syntex rumors may be false - we are going to bet that they are but there are no guarantees.  We are going to buy more but that's all we can tell you".

Did we use inside information?  In today's world, some government officials would think we did.  But what in the world is research if you don't try to learn more about the companies you are interested in than other people have learned about the same company?  How do you draw the line between thorough aggressive research and guaranteed inside information?   I am absolutely certain that more so called "hot" stories both negative and positive, are right as often as they are wrong.

The SEC is busy indicting specific individuals for alleged use of inside information.  That might be a good idea or a bad idea, but to me it makes very little sense.  For every investor that wins with an inside tip one loses - the net effect on the market is really zero.

Why doesn't the SEC randomly pick 25 investigators.  Then pick 25 brokerage offices around the country.  Then subpoena the records of 10 brokers in each brokerage firm they select.  Then call each of the selected brokers into a room and ask them what they know about the companies that they had been recommending to their clients.  Having done this in my own mysterious way in the past, I am certain they would discover that most brokers had little to any specific knowledge on the companies they were recommending.

Now we have cases where money managers, who are paid a lot of money, break their backs trying to ferret out information for their clients so that they have a chance of achieving a positive return on their investments.  If inside information was of any particular value, there would be all sorts of money managers achieving returns far in excess of the overall averages.  If the government wants to claim that the only thing money managers should do is read public reports, then there really won't be any need for research at all. Any investor could attempt to ferret out the same information as the money manager.

I guess we will get to the point where someone invents something and is required to expose their invention to the marketplace before they even make the product.  Some investigating agency could claim they had "inside invention" because the inventor spoke to a scientist, who was sitting in his rowboat in Fiji and mentioned a molecule he felt may have some promise, and the inventor used the molecule.

If Jim Cramer gets some information from somewhere and recommends it on his program, and I don't happen to watch his show because I don't subscribe to his station, did his viewers have inside information compared to me?  There is a reason why our standard of living doesn't increase anymore.  That's why sunshine turns into stormy days.

A PARTICULAR MONEY MANAGER TOOK A LARGE STAKE IN THIS COMPANY KNOWING THEY WERE GOING TO THE MANAGEMENT FOR THE PURPOSE OF INCREASING SHAREHOLDER VALUE.  THE  INVESTORS WHO SOLD THEIR SHARES TO THE MONEY MANAGER DID NOT HAVE THIS INFORMATION WHEN THEY SOLD THEIR SHARES.  THAT'S A CLEAR CUT EXAMPLE OF INSIDE INFORMATION THAT GOES TOTALLY UNNOTICED BY THE INEXPERIENCED PEOPLE, WITH LITTLE INVESTMENT BACKGROUND, WHO HAVE BEEN AND ARE NOW INVOLVED AT THE SEC.  

No comments:

Post a Comment

 

Shepard Osherow. All Rights Reserved