Or, the importance of doing your own research.
The volume of financial articles published every day is phenomenal. Not only are there press releases and analyst reports, but mainstream financial media like the Wall Street Journal and Bloomberg are followed by legions of independent and networked bloggers such as are found at Seeking Alpha and Motley Fool. This volume is daunting to the individual investor wanting to learn about a company. Analysts down to individual bloggers are keen to crank out their own analysis to gain larger audiences and influence.
How should one deal with this fire hose of information?
Ignore it.
There is some use to this information, there are tidbits of actual, objective fact floating in the ocean of words. A brief scan of an article can draw that out. However, there are a lot of mistakes, particularly in the rise of blogs that appear to be written from a formula or template, with no actual thought or analysis in the process.
Motley Fool uses templates to answer standard questions. Their “Why did my stock just die?” template takes stocks with huge one day drops and attaches an important news piece to each, inserting a bit of opinion, but generally leaving the analysis up to the reader.
There is nothing very wrong with using a template or a form to produce or present analysis, it brings discipline and consistency to the field. However, the terrible trend here is ridiculously incomplete analysis, or blatantly ignorant analysis.
The first ignorant article I encountered today was about railroad stocks. The headline tipped me off that the analysis would be the product of ignorance. “Four Railroad Stocks With Potential In 2012” This caught my eye because 1) I like railroads and 2) there are only 8 operators in North America, and only 15 railroad related companies traded in the US. To find 4 with potential is kind of like saying “Here are 1250 stocks that may be interesting.“
Reading the article, you can see that it is essentially a list of facts about the company, drawn from pretty much any financial website or earnings release, presented in paragraph form. There is no analysis here except a few sentences like “…will benefit from an improving economy.” and “I think Jim Cramer is right.” The former statement is practically self-evident so long as you are not talking about shorting the market and the latter is probably a joke, though the author does not realize it.
So, at this point, this article is simply an aggregation of facts from elsewhere, great, useless. However, reading what railroads the author decided to call competitors. Of course, all railroads compete with (and cooperate with) each other in some way, but this article avoids selecting any of the screamingly obvious, overlapping networks to call competitors. The article pairs Norfolk Southern’s east of the Mississippi network with BNSF’s network which starts on the west coast and meets NSC in the middle. Union Pacific, with their network solidly in the Western US only competes directly with Canadian National in the Chicago – St Louis – Memphis stretch. CSX, whose network overlaps with NSC is paired with Canadian Pacific, who has a network that overlaps pretty much completely with Canadian National.
(Just to be complete, here is my opinion of the most direct competitors based on operating region: NSC with CSX, UNP with BNSF, KSU with everyone in the middle, but uniquely nobody due to their reach deep into Mexico)
Basically, anyone reading that article would learn nothing that the company had not already said (probably in much more detail) within the past few months, and would have a perverted idea of who the railways were competing with. There you go, a waste of your time (and clearly mine too).
Another shockingly bad article had even worse implications.
A lot of investors depend on dividends not only as a sign of health of the company, but as a source of income. When an ignorant blogger proclaims they have found a huge, safe dividend, someone may take a wrong turn if they follow the blogger’s advice.
Forbes has lent this article its credibility by hosting it. The article proclaims that investors can pick up an 11% yield cheaper than insiders have bought recently.
This article is riddled with basic errors and misleading statements.
Firstly, not all insiders are buying. In fact, the most recent SEC filings indicate selling, at an even lower price than the buying touted in the article.
Next are maths errors. The article boldly proclaims that SVP Moore, who bought at 17.50 on 8 August, has lost 110.8% of his investment. This is fairly shocking, of course, because it means he now owes money just to hold the shares. This is simply untrue. I won’t even wade into the ridiculousness of that.
The last thing I will mention is the dividend. Or, the lack thereof. 26 October, weeks before this 17 November article came out, Orrstown Financial Services released their quarterly earnings and announced in the same statement that they were discontinuing their dividend. When this announcement came, there was a massive selloff in the stock. This is apparent from the chart shown in the article. Even the least inquisitive of investors would notice this and ask “why did that happen?” and with very little effort, realize that this was no longer a dividend paying stock.
There is a lot of financial news and analysis out there. Ignore it. The only thing you need to do to analyze a company is start asking questions, and then look for the answers. You won’t get that from 99% of blogs out there.
Disclosure: I own both NSC and ORRF.
