“Sponsored investment research” is as much of an oxymoron as “Congressional ethics.” Yet investors often skip over the fine print included in this sort of marketing material (let's call it what it is) and assume sponsored research means a potential investment has undergone fact-based, independent scrutiny.
A recent Chuck Jaffe headline (he's a fellow columnist for MarketWatch) caught my eye: Fox Commentator Paid $50,000 to Tout Stock. Jaffe details how celebrity money manager and Fox News analyst Tobin Smith was paid to promote Petrosonic Energy Inc. (PSON) as the “investment opportunity of your lifetime” in a 20-page mailer. Never mind the going-concern letter from auditors expressing concern about the company's ability to survive, or the fact it had no revenue. Hey, if a smiling face you recognize from television is on a mailer, it must contain the truth.
Vedran Vuk had this to add when we discussed the outrage:
“What's the real scandal, taking money for a pitch or just blurting out 20 different names as recommendations without the slightest bit of research? Business as usual is just as bad as the paid pitch, in my opinion.”
I agree; both are bad. So how can we recognize the differences between a paid infomercial, lousy research, and honest-to-God research? Here are six tips to get you started:
- Real research does not make unrealistic claims. The Petrosonic mailer touted huge gains in the stock's price over the past year, yet the company itself had no revenue. Maybe the stock was doing so well only because the right folks were being paid to push it.
- Real research outlines the negative side of a company in detail. While Petrosonic's promotional material was lengthy, it omitted the company's increasing losses and negative cash flow. Petrosonic noted in its regulatory filings that it would fail if it couldn't generate adequate financing, but that statement was conveniently absent from the mailer.
- Real research is straightforward and complete. As investors, we want a realistic picture of potential risks and rewards. If information is convoluted or hard to follow, we're probably not getting the full story.
- Real research goes beyond the company and into the market. True research will look at all avenues of competition. Are there competing technologies that could make a company's main product obsolete? Are there proposed regulations or potential tax hikes that could hamper profits? I sure wouldn't want to invest in a company that only makes 44-oz. drink cups sold primarily in New York City, even if they are the best damn cups around.
- Real research explains the company's products and what sets them apart. When we invest our hard-earned money in a company, we want it to increase profits. Real research will tell you: why you would want to be a part owner of the business; what makes the company unique; and why the company is likely to continue to be profitable.
- Real research teams understand the consequences of their recommendations. True research professionals are paid to offer advice, and they take that responsibility seriously. They don't recommend anything they wouldn't invest in themselves, and they are available to answer questions and provide follow-up information—like when to sell. If a recommendation turns sour, they scurry to get their clients out with minimal damage. Folks who do not care about the consequences of their recommendations won't last long in a truly independent research company.
So what became of Tobin Smith and his investment opportunity of a lifetime? Fox fired Smith, and Petrosonic plummeted in light of the shady deal. There was a lot of doubletalk from Smith about how he didn't do anything wrong under the terms of his contract. He claims he was not subject to the same prohibition against these sorts of paid endorsements as everyone one else at Fox News, but give me a break!
Regardless of the details of his contract, he lined his pockets by issuing questionable investment advice to folks like you and me. As Vedran said, “I wonder how guys like that can even sleep at night.” Maybe all that endorsement money keeps their cabinets full of sleeping pills to wash down with pricy Scotch.
Never Underestimate the Value of Common Sense
Detailed financial information on potential investments is readily available on the SEC's website, and it only takes a few minutes to confirm a few facts before putting your money at risk. Scam artists bank on our blind trust, and it's incumbent on investors to do a little background check before deciding what to believe about a company.
As you research an investment, be wary of doubt-casting statements like, “this is a true story” and “trust me.” True professionals understand that trust is earned over time and guard their good reputations dearly. When in doubt, trust your instincts! Our subconscious minds are great at recognizing subtle clues, but we still have to stop and listen to them.
Retirees in particular don't have the luxury of a do-over. Once we leave the workforce, we no longer have the chance to earn back big losses. That's why we should never buy in to a company just because a television pundit or a newsletter editor recommended it. Instead, only invest in well-researched companies you understand. We become part owners when we hand over our money; if we wouldn't be proud to hang our name on the company's door, it's better to pass on the investment.
Speaking of research, we hope that you check out our own with a free trial to Miller's Money Forever. Our next issue is coming on Tuesday and features a company that has grown revenue nearly five times in the last decade, while at the same time being in a very defensive industry—it's almost the best of both worlds for a retirement portfolio, combining growth and defense. Try a free trial now.