Research and Enronization

by Albert W. Thomas All rights reserved,

For years I have been saying that research is worthless and these past few days have given outstanding proof that it is true. All the due diligence anyone could have done would not have saved you from Enron. You could have drawn a report from your broker or Morningstar (I’m sure they must have had one) and you would have been told only what the company wanted them to know. When analysts do their investigating they collect data about a company and industry. Most of the data they get from the company itself as they rely on being told the truth. They read the prospectus and the Annual Reports. Brokerage companies prefer to have their analysts err on the side of a bullish conclusion. It is not that the analysts are dishonest. They must work with what is available to them even to the point of going out to visit a company and speak with management. You can be sure that management is not going to tell them the “bad stuff”.

These days it seems that analysts who are supposed to be neutral have become salesmen for the brokerage companies. Why? Let’s be analytical. How can the broker expect to make a commission if the analyst comes in with a negative recommendation? If that analyst keeps coming up with negative or lukewarm reports (they never say sell) the broker will fire him and he knows this as he has seen others in his profession kicked out for just that reason. The broker is not there to make you rich. He is there to get rich off you. So what can you do? How do you not do research and still pick winners and also protect yourself from fraud and deceit?

Picking a stock or mutual fund can be done in any number of ways. What you buy and when you buy, believe me, are the two least important aspects of making money in the stock market. I know that is heresy as far as what you have been taught by the Wall Street mavens. They are either lying or stupid – your choice. The one great secret of success, profits and riches for equity investment is selling. One word that will make you rich is ‘sell’. Because you are not a trader and will not or cannot take the time to follow your stocks and mutual funds every day or even once a month here is one thing that will keep you from experiencing severe losses. Each quarter of the year look to see what the lowest price has been for stock you own and place an Open Stop Loss Order just under that number. Ask for a written confirmation. Never lower the stop price. Your broker will not want to do this because it makes him work. He then has to watch your account. He will tell you he will watch your account. He won’t and I can almost guarantee he will not call you when your position starts down. You are the only one who can protect your capital. If your broker won’t cooperate get another broker. It is your money.

Enron

Even if you don’t own any of their stock or any stock at all you will want to read this.

What Enron corporate officers did with their accounting firm is nothing new. It has been going on for years, but recently has become more egregious. Hiding facts from stockholders by showing Annual Reports with tiny footnotes has been happening for years. Even experienced accountants have trouble understanding what various financial statements mean. What chance does the little investor have? And that is the whole idea. The insiders don’t want the outsiders to know what they are doing with the company money.

You have been told by your broker and by brokerage company advertising that you should do your research before you buy. You can research until you are blue in the face and still not know. For years I have been preaching that research is worthless.

You can go to the nexus of all research companies – Morningstar – and still the report they give you will not tell you the whole true story. I have recently been told that Morningstar is about 6 months behind in the posting of their material. Maybe and maybe not, but it doesn’t make any difference if the facts they are reporting are lies. This is not to fault Morningstar as they are merely a conduit of information.
There should be a lot of good things happening as a result of the bankruptcy of Enron. The duplicity of Arthur Andersen is despicable. They were acting both as consultants and auditors. The consultants were telling the company what to do and how to get away with it and the auditors were rubber stamping their actions. It’s like having the fox guard the hen house.

For some time the Securities and Exchange Commission (SEC) has been looking into recommendations by in-house analysts of brokerage firms who have made Initial Public Offerings. These analysts should keep their mouths shut. Can you imagine any analyst keeping his job if he should happen to tell the truth about a stock his company was pushing? Those beautiful full color reports from your broker belong in the wastebasket.

It is about time that the SEC cracks down on both these types of scams. And that is what they are. Anything to get the investor (you) to part with his money. For the next year we are going to see more Enron-type accounting scandals. These will cause the investor to become very wary about what to buy so he won’t buy anything. This will cause the stock market to be weak. Each time another one hits the fan there will be additional selling. The basic confidence of the investor has been shaken and it will be a long time before it returns.

I do sympathize with those who lost their money in Enron, but I do hope it will have the effect of activating some of the Washington bureaucrats to act to protect the millions who have not yet been victimized.

Al Thomas is the author of “If It Doesn’t Go Up, Don’t Buy It!”

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