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Trader Lesson: How to Research Your Stocks to Avoid Fake News
09/28/2017 10:05 am EST
Before you trade or invest, research stocks by using sources like the SEC, CFTC and credible news sources, writes Steve Pomeranz, CFP, who is the host of an investment program on NPR affiliates. Look for more Trading Lessons every Friday on MoneyShow.com.
My topic for today is are you getting your financial news from a trustworthy source or not. Websites and blogs are inexpensive and easy to put together, so there is a lot of junk financial content out there that’s not trustworthy and filled with junk claims and junk data boosting all sorts of dubious and not so dubious securities.
I guess I should call it “fake financial news” and credit President Trump with giving me the idea for today’s topic.
SEC cracks down on sponsored research
Now here’s some hard data behind fake financial news. Earlier this year, in April 2017, the Securities and Exchange Commission (SEC) charged 27 individuals and entities with perpetrating a variety of stock promotion schemes.
SEC investigators found that certain publicly-traded companies had hired public relations firms to promote their stocks under the guise of independent research but failed to disclose the compensation aspects. So, these articles were nothing more than paid advertisements.
As Stephanie Avakian, acting director of the SEC’s Division of Enforcement, puts it: “If a company pays someone to publish or publicize articles about its stock, it must be disclosed to the investing public. These companies, promoters, and writers allegedly misled investors by disguising paid promotions as objective and independent analyses.”
Pump and dump by Galena Biopharma, Inc.
For example, in 2013, a publicly-traded company called Galena Biopharma misled investors by commissioning over 100 paid articles that promoted Galena on investment websites, including one article on Seeking Alpha where the author falsely stated that he had not been paid to write the article. Galena paid over $20,000 per month for these fake financial news articles and also launched a 240-day blitz on social media sites such as Facebook and Twitter—to target retail investors. None of those articles or posts disclosed that it was paid content. As a result, Galena shares jumped from under $2 to over $7 per share, and Galena insiders profited handsomely by selling shares at elevated prices. The SEC subsequently filed charges and fined Galena and its CEO, but no one went to jail. And as of September 6, Galena’s share price was about 35 cents.
So, be wary of even legitimate posts on well-known sites. I am not saying it’s all fake, but there sure is a lot of fake financial news out there, disseminated through a web of interconnected sites, which makes it hard to tell real from fake. So, in some ways, while the internet has made stock research much easier and empowered retail investors, the proliferation of fake news has made the role of a financial advisor all the more necessary—necessary because most amateur investors need a grounded and credible person to help parse the good from the bad, to help identify financial news that is trustworthy and credible.
Be wary of investment research websites
In another example, one hired writer hyped stocks under his own name and under, at least, nine other made-up names, such as Equity Options Guru, The Swiss Trader, Trading Maven and Wonderful Wizard. In one of his bios, he falsely claimed to be “an analyst and fund manager with almost 20 years of investment experience.” That’s clearly a violation of authenticity and definitely qualifies as fake financial news.
The SEC fined several of the publicly traded companies involved, and still has a few cases pending. In addition, the SEC issued an alert warning investors to never make investment decisions solely on the basis of articles published on investment research websites, but to research the company thoroughly using multiple sources. Amen to that!
And I’ll add, the SEC’s own website is a great resource for genuine company data and information that public companies are required to report quarterly. I’ll make sure there’s a link to this on my website. All you have to do is go to the SEC’s Edgar Company Filings website and enter the company’s name or ticker symbol to get more information. Best of all, it’s completely free and 100% trustworthy!
Read the fine print, search about the author
While fines are a bit of a deterrent, I think the SEC only got to the tip of the iceberg and probably does not have the resources to chase down investment scammers that are often based outside U.S. borders, hiding behind anonymous servers in the dark web. So the SEC’s enforcement actions aren’t going to stop fake financial news.
That is why I’m talking about this right now. If you come across a story that makes a stock look extraordinarily attractive, don’t get over-excited and rush to buy.
Instead, take a deep breath and see if there is any fine print that says the post is a paid advertisement or that the author owns shares in the company. If there is proper fine print, that’s good. If the post appears too bullish and there is no fine print, then that’s a red flag.
Also, check the author’s bio, Google his or her name to see if it’s a ghost-writer or a pseudonym and if the author is genuine and credible. If everything checks out, it could still be fake financial news because scammers always get more sophisticated when law enforcement gets involved. Dig deeper to see if that stock is worth adding to your portfolio.
FINRA or not?
Next, go to websites such as Google Finance or Yahoo Finance or your brokerage firm; type in the company’s name or ticker symbol and check its valuation, its price-to-earnings ratio, its recent news, and its most recent earnings press release. Do your own due diligence to decide if a stock is attractive.
Here’s something else you should know: Most brokerages are members of the Financial Industry Regulatory Authority or FINRA and cannot knowingly publish false or misleading information. Moreover, their publicly available content has to be carefully screened for fairness and balance. So using your broker’s website to research stocks is always a safer bet.
On the flip side, online publishers of financial news that are not FINRA members are not bound by FINRA’s “balanced and fair” guidelines and could publish stuff that is biased, untrue, and knowingly misleading. So watch out for fake financial news from such non-FINRA sites.
And check financial professionals at the Commodity Futures Trading Commission SmartCheck here:
Read the company’s news from multiple sources
Google’s and Yahoo’s finance sites also give you links to articles on the stock. Read articles from multiple sources over at least the past three months to get a better picture of the company. The good news here is that buyers and sellers of the same stock often present and publish very different views on the same company, so looking up different sources will give you a good sense of the stock’s pros and cons and can alert you to what is fake financial news and what is not.
And if you’re a serious investor, like Warren Buffett and his ilk, you should also read the company’s quarterly financial filings (also known as the 10-Q) and annual reports (also known as 10-K) on the SEC’s website. Look at the CEO’s and CFO’s comments; look up the company’s revenue, earnings, earnings per share, debt levels and cash flow, and look for patterns over the last few quarters to see if they match the investment research site that’s promoting the stock.
If everything still looks good, consider buying the stock. If you have a financial advisor, consult him or her about how this stock would fit into your overall portfolio goals and get a trusted second opinion. Then, invest with peace of mind and the confidence that you’re not a victim of fake financial news.
To find out more, go to www.stevepomeranz.com
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