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Fake news is a hotly debated topic in political media. It refers to misinformation that is either sensationalized, exaggerated or outright false.
Fake news is also rampant in the investment industry. Before the internet, unsubstantiated stories were spread by traders and filtered down the chain to brokers at investment firms. But today, technology has brought a new level of sophistication, allowing unscrupulous operators with well-designed websites and bogus credentials to spread phony financial news with the goal of influencing stock prices.
In April, the SEC announced enforcement actions against 27 individuals for collecting secret compensation on stock promotion schemes that were disguised as unbiased investment research. The writers used different pseudonyms to publish multiple articles touting the same stock and sometimes listing fake credentials, such as accountant or research analyst.
The SEC investigations uncovered public companies that had hired these promotors to publish bullish articles about the companies “when in reality they were nothing more than paid advertisements.” Of those charged, 17 have agreed to settlements as high as $3 million, while litigation continues against the others.
Some of the websites identified by the SEC, where authors did not appropriately disclose payments, include Benzinga, Wall Street Cheat Sheet, TheStreet, MarketPlayground, Investor Village, Investing.com, SeekingAlpha and Forbes. Articles from these websites appear to gain more credibility when they are linked to popular financial portals like Yahoo! Finance.
SeekingAlpha is an interesting case study. The website invites investors to post their own investment analysis on companies. Typical of social media sites, authors are ranked by the number of followers they attract. Comments follow articles, allowing for a debate of the posted material. The quality of the content on SeekingAlpha runs the gamut of professional investment research, from certified financial analysts to inexperienced investors who post poorly written pieces riddled with errors.
Fake financial news is also disrupting the computer-driven programs that quantitative hedge funds use to trade in the markets. Their software programs scan massive amounts of market data, including news articles, twitter feeds and other trends in social media in an effort to identify the information that will move stock prices. The “quants” are concerned that fake news is feeding erroneous information into their systems.
Criminals have come a long way from the “boiler room” shops that would cold call investors and tout penny stocks with high pressure sales tactics. They have evolved into using innovative methods to make money or influence investors in very sophisticated ways.
Fake news is a serious problem for investors who are influenced by the opinions of others. There is no harm in consuming a variety of opposing views when forming your own investment opinions.
But your goal should be to reach a rational decision based on fundamental reasoning and weighing the probabilities of success for the particular investment. This can be accomplished by a thorough analysis of the business from its historical financial statements to the annual letters written by management. You are your own best research analyst.•
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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 317-818-7827 or ken@aldebarancapital.com.
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