A MUST READ-->Investors in search of advice used to call their brokers. Or read the Wall Street Journal.
Then came the financial television networks - CNBC, fnn, Bloomberg - and ordinary people gained access to some of the high profile analysts whose predictions and advice occasionally move markets.
Along came the Internet, and with it a constantly expanding group of financial newsletters that offer reports and recommendations on everything from well-recognized blue chip names to little known companies looking to attract investor interest.
But not all newsletters are created equal ? some offer objective analysis while others are merely promotional tools hyping stock to unsuspecting investors. How can consumers tell the difference? We offer a few thoughts.
1. Has the newsletter, or anyone associated with it, been compensated by the company it is profiling? Some newsletters receive cash, or stock, in exchange for writing a report on a public company. In those instances can the "report" really be called objective and can the newsletter be considered unbiased?
2. Does the newsletter offer a balanced view; that is, does it point out the negative aspects of an investment as well as the pluses? In order to make a thoughtful investment decision, investors need to know a company?s potential problems as well as its promise.
3. Is the newsletter merely a repetition of information contained in company press releases? If the answer is yes, then it would seem that this "newsletter" is merely a public relations tool. In that case investors should recognize that the report or recommendation they are receiving does not necessarily reflect any objective analysis.
4. Is someone guaranteeing a profitable investment or describing a stock as a "sure thing." There are no "sure things" in the stock market, and no one can guarantee the future of an investment, (or the winner of a horse race or the outcome of a prize fight for that matter) ? unless manipulation is involved.
5. Does the newsletter claim to have information of impending developments that are likely to boost the stock of a little-known company? Since passing on non-public material information to potential investors (more commonly known as "insider trading") is unlawful, it is more likely that the newsletter is either spreading unsubstantiated rumors or acting as a public relations vehicle for the company. In either case, investors should treat such "promises of sugarplums" with a healthy dose of skepticism.
6. Are the potential risks clearly outlined and defined? Some newsletters may simply offer the blanket warning that all investments can be risky. That is insufficient. Every investment carries with it specific risks that should be outlined by the person making the recommendation so that these risks can be assessed by potential investors.
7. Does the newsletter recommend little known microcap companies with no significant track record, scant assets, and little or no financial success? Such reports should generally point out the significant possibility that investors may lose their entire investment. If they don?t ? be wary.
8. Can an investor find supporting information about the company recommended in a newsletter? For example, is it possible to determine the number of shares outstanding and the names and background of the company?s management and principal stockholders. Are financial statements available? Without such information, an investor cannot possibly make an informed judgment about a company ? and neither can a newsletter.
One final thought. If something sounds too good to be true, chances are it?s too good to be true.
And, as always, the buyer should be wary.
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