Webcast #15: Who Can You Trust? (10 minutes)

Abraham Lincoln famously said that “You can fool all the people some of the time and some of the people all the time, but [never] all the people all the time.”

There is no shortage of information and opinions available that cover market strategy, sector trends, and individual stock recommendations for investors to consider. With this abundance of information, it is often difficult to identify which sources to trust.

Analyst Research

Equity research is published by large banks and brokerages. These reports are heavily filled with conflicts. Sometimes the disclosures written in fine print at the end are longer than the report itself. The analysts who write these reports are often chummy with the management and when it comes time place a Buy, Sell, or Hold rating on the stock, on average only 5% of ratings turn out to be a Sell. In fear of losing access to management (who may also use that same institution for investment banking services), it is rare to ever see a Sell rating.

Media

Business channels such as CNBC and BNN are a great source to hear varying perspectives, particularly when there is an open discussion between two portfolio managers with opposite opinions. We are fans of CNBC’s Halftime Report hosted by Scott Wapner, which airs weekdays at noon. However, when listening to a positive endorsement about a stock, keep in mind that a portfolio manager may have clients who already own the stock (perhaps at lower prices) and is unlikely to offer a negative opinion knowing a client may be watching on television at home.

Company Financial Statements and Conference Calls

Every three months, public companies publish their quarterly financial statements and often host a conference call.

Financial statements include an Income Statement showing revenues and costs for the last three months, as well as a comparison to the year before; Balance Sheet showing a snapshot of the assets and debt obligations; and a Statement of Cash Flow displaying cash generated from operations, financing, and investing. Because these statements are independently audited, we review them in close detail every three months, particularly the Statement of Cash Flow which is subject to far less accounting discretion than the Income Statement. The Annual Report is a much longer document and includes a qualitative discussion about the risks facing a company. We find this section to be very useful and important to read.

Conference calls are often thirty minutes to an hour in length and include scripted remarks about the previous quarter’s results followed by a question-and-answer session. We listen to these calls paying particularly close attention to the Q&A. This is our favoured source of information and the source we trust most.

Online Sources

Online content found on social media, message boards, or websites can be valuable but often inaccurate. Because anyone can publish a statement (often anonymously), it is vital to verify anything found online with a second source.