Investors can be manipulated by digital media to overpay for promoted shares. That’s the finding of new academic research conducted on both sides of the Atlantic — but there is nothing theoretical about the risk of people being misled about stocks. Last weekend US investigators accused the UK stockbroker Beaufort Securities of a “pump and dump” fraud, which involves promoting shares to boost demand and prices before cashing in as clients buy. (City regulators have closed the firm, freezing nearly £800m placed with it.)
The research, carried out in London and Boston and exclusively revealed to The Sunday Times, shows how prominent placings on Yahoo! Finance can affect investors’ decisions.
Thousands of website users and more than 300 company announcements were scrutinised to reveal how share prices were boosted by the way in which financial news was presented. Alastair Lawrence of London Business School told me: “A key takeaway from our research is to be wary of ‘hot’ stocks and sectors. So don’t follow the herd, but be sure to look for good reasons to invest.”
James Ryans, also of London Business School, added: “Selecting stocks which are attracting a high level of attention could mean you get a lower return on your investment.”
Their field study assessed the share prices of 169 companies making earnings announcements over the course of 11 weeks. These businesses were randomly selected to have news articles about them shown to financial website users; another 169 companies, selected from a total group of more than 1,134, were selected to serve as a control sample.
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The effect of media attention on share prices was found to be more pronounced for smaller companies — sometimes called “penny shares” — and those that normally keep a low profile.
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On the day of the earnings announcements, media articles for the random sample were given prominent positioning on the front page of Yahoo! Finance to a 1% sample of users, typically boosting share prices by 2%.
Estelle Sun of Boston University and Nikolay Laptev of Yahoo! also participated in the research, which was structured so viewers of Yahoo! — one of the world’s most popular financial websites — would not be misled.
Boston University’s Institutional Review Board, London Business School’s ethics committee and the University of California’s Office for Protection of Human Subjects were consulted to ensure no investors suffered financial loss as a result of the research. The findings have been presented to the Securities and Exchange Commission, America’s chief financial regulator.
Lawrence urged investors to be wary of having their decisions manipulated by media coverage, saying: “Give yourself time to consider, for example, the company’s profitability, dividend payments and recent valuations. Although financial reports are a great source of company information, they’ve grown enormously in recent years and the laudable demands for transparency make them difficult to digest for the average investor.”
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As I have pointed out here before, regulatory requirements for the disclosure of financial information can have unintended consequences — and more really may mean less. Long documents, even those marked “Important”, are often ignored by busy people.
Many reports and accounts may tick all the corporate lawyers’ boxes but be read by very few shareholders. The 24-hour news cycle can also present hazards for investors, as the independent financial adviser Alan Steel explained: “We live in an age of information overload and knowledge deficiency. How many times a day do you think Warren Buffett, one of the world’s most successful investors, looks at his smartphone? I’d be amazed if he has any hand-held device apart from his regular cherry Coke.”
Mark Dampier, a director of the investment firm Hargreaves Lansdown, put it this way: “People used to complain about financial coverage in the newspapers, but the internet is far worse because the demand for content is huge and insatiable. There simply isn’t the quality of content to go round. It reminds me of the launch of satellite TV, which was heralded by some as a great increase in choice — until we all realised that most of the programmes were rubbish.”
The internet is the biggest library that has ever existed and a great boon for investors — including your humble correspondent. When I was a cub reporter 30 years ago, it often took hours to obtain information that is instantly available now. However, we live in an era in which entertainment is valued more highly than education — just compare footballers’ pay with that of teachers — and even some financial media seem to prize excitement over enlightenment. So it is vital for investors to remain sceptical about the information provided, particularly when this appears to be “free”.
Twits on Twitter sometimes complain about The Sunday Times’s paywall, but I always tell them news and views worth reading are worth paying for; everything else is advertising. Or, as they say in Silicon Valley: if you don’t pay for the product, you are the product.
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Closer to home, common sense remains the best protection against fraud and negligent misinformation. Investors should always ask themselves, “Who benefits?”, before parting with money.
Steel advises people to do their homework, reading widely to identify profitable trends and to “ignore the noise online”. It’s a case of new technology, same old human nature.
Take AIM: a way to avoid inheritance tax – and squabbles
Anyone who hopes to beat inheritance tax by giving away their assets sooner rather than later should go and see King Lear first.
As Shakespeare knew, even apparently doting adult children may prove less than grateful once they have got what they want.
On a brighter note, you can say what you like about money, but it does encourage the kids to keep in touch.
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Another way to avoid this 40% posthumous tax is provided by a quirk in the way some shares on the Alternative Investment Market are treated by HM Revenue & Customs.
AIM companies that are not involved in agriculture, financial services or property can be exempt from inheritance tax after you have owned them for two years, instead of the usual seven-year requirement for gifts to become tax-free.
So people who expect their estate — or assets after all liabilities — to exceed the inheritance tax threshold of £325,000 can shelter assets from this tax without giving them away by investing in AIM shares.
Neil Moles, managing director of the wealth manager Progeny Group, pointed out: “AIM stocks are overlooked in inheritance tax planning because of a perception problem.
“AIM was set up in 1995 to help smaller companies access capital and its 10 stocks had a total value of £83m. As a result, they didn’t feature on most people’s radar.
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“Now AIM boasts just under 1,000 companies with a total market capitalisation of £63bn.”
These still tend to be riskier than those on the main market but now include several serious businesses — such as the fashion firm Asos, my favourite tonic maker Fever-Tree and the brewery Young & Co.
So AIM may be worth a look if you want to have your cake without worrying about the taxman eating it.
Read a breakdown of Ian Cowie’s ‘forever’ fund thesundaytimes.co.uk/cowieholdings