Watching out for disclaimers that are not in the open  

February 7, 2006

“Investing is simple, but not easy”, said the legendary investment guru Warren Buffett. Unfortunately, a large army of retail investors don’t listen to sound advice from real gurus with an impeccable track record. Instead, they follow the wisdom quoted on a bullish website that says, “Don’t confuse brains with a bull market”.

There is nothing new in this attitude; human nature has remained the same for centuries. Jesse Livermore, a legendary speculator (who correctly predicted the crash of 1929 that led to the Great Depression) had said: “The average man doesn’t wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think.”

This quote has held true in every major bull market around the world, whether it is in stocks or commodities. New generations of investors come into the market believing that the shortest route to riches is instant trading tips. It is happening again as the Sensex soars past 9700 and towards the 10000 mark.

Discerning investors have often noticed how even so-called ‘experts’ voice confident opinions that are proved disastrously wrong within a day. To their credit, many of them readily admit their misjudgement; but to them it is usually means a sheepish smile, a shrug and a new prediction for the next day. Investors who may have acted on the advice could easily have lost their shirt.

The danger of relying on such tips was established by the Securities and Exchange Board of India (SEBI) when it issued “cease and desist” orders against Mathew Easow, a popular analyst and advisor on www.moneycontrol.com and top television channel.

Easow doled out instant advice to investors who called in with specific queries almost on a daily basis. Should I buy a certain stock, hold it or sell? Easow had an answer to every question.

Technically, SEBI regulations require all analysts who comment and a stock or offer advice to declare their own trading positions at the end of the show. This is to give investors a sense of whether or not the expert has a vested interest in a particular recommendation. However, television anchors are usually very breezy about ensuring proper disclosures.  I have often seen analysts say “I hold positions in some of the stocks discussed in the programme”, without specifying what they are. This clearly violates the spirit of SEBI’s disclosure rules, but it was always assumed that the regulator wasn’t watching closely and nobody would bother to analyse every recommendation against the real trading position of the analyst.

SEBI did just that and unearthed the problem. It passed an order under the Prohibition of Fraudulent and Unfair Trade Practices regulations, based on the analysis of three specific stocks where Easow’s trading position was the opposite of his recommendation. He was actually selling stocks which he had advised investors to buy or vice versa.

Most stock brokers will tell you that this practice is as old as the hills. Broker reactions on hearing the order are revealing. They point out that brokerage firms send their analysts to television studios in order to build a profile for the firm and a market following. But why would anyone who is an expert spend a part of his/her working day dishing out free advice to anonymous investors as if they are on a mission to enrich strangers?  One successful broker says: “if I have a hot tip, will I be stupid enough to go and reveal it on national television? The only time I will talk about a hot stock is when I have bought enough of shares myself and am looking to sell and book profits”.

This is exactly what SEBI seems to have found in the Easow case. Interestingly, Easow’s website has a fairly iron-clad disclaimer which says, “Mathew Easow Research Securities Limited, Mathew Easow and their relations, business associates and clients have a vested interest in the above mentioned share and will benefit if the prices move up or down. Mathew Easow and matheweasow.com gives an unbiased and competent picture of trading opportunities and it does that to the best of its abilities. However, prices can move up as well as down due to number of factors, all of which are impossible for anyone to foresee. THEREFORE, MATHEW EASOW RESEARCH SECURITIES LIMITED and matheweasow.com and Mathew Easow cannot accept any responsibility for any investment decision or trading decision taken by readers and clients on the basis of information contained herein. Sometimes Mathew Easow Research Securities Ltd, Mathew Easow and their clients, relations, Business Associates etc. may hold contrary positions to the above recommendations.

The information, opinions estimates and forecasts contained here have been obtained from, or are based upon, sources we believe to be reliable, but no representation of warranty, express or implied, is made by us to their accuracy or completeness. Opinions expressed are our current opinions as of the date appearing of this material only and are subject to change without notice”.

Clearly, anyone who acts on Easow’s recommendations (on the website) does so at his/her own risk. Unfortunately, the disclaimer was not available to the average investor who checked out his tips on the moneycontrol.com website or heard him on television.

I learn that SEBI is investigating three more cases of analysts giving tips that are contrary to their trading position. The regulator has also warned the media to ‘‘ensure’’ that it is not misused by analysts for personal gains and exercise ‘‘due care and diligence’’ by calling persons with proven credentials to offer advice. Since so many media companies are listed on the stock exchanges and directly under SEBI supervision, they will have to take this warning seriously. This is good news for investors because it even protects those who are foolish enough to act on instant tips, without doing their own research.

(This column first appeared in the Hindustan a leading Hindi language newspaper)