Disinformation in the Investment World

The main documents pertaining to the state of a business are either legally notarised, such as the memorandum and articles of association, or are heavily regulated, such as the audited financial statements and analyst reports. This information, however, is not enough to understand the business and quite often colour needs to be added in the form of written and verbal commentary from management. Regulation of this commentary is either light or easily circumvented allowing management to present a picture that is at best optimistic and at worst fraudulently manipulative. I had the unfortunate experience of being exposed to several such companies.

I am not talking here about defamation, i.e. a false negative characterisation of one party by another party. This is purely about companies falsely presenting themselves in a more positive light. The harm if you are an investor is clear: you end up investing based on false information. As a competitor the problem is that investors and clients will falsely be drawn to other companies not based on superior performance, products or services but unfairly based on false advertising.

The difficulty in regulating or even addressing corporate disinformation is that what we are specifically talking about here is interpretation of data as it relates to the health and performance of the company. Manipulating financial data is possible but much harder as there is a factual basis as opposed to interpretation and opinion.

Initially I made the mistake of trying to right the wrongs of disinformation. This is a fool’s errand since an honest man is simply not going to win against a liar and despite what Hollywood might tell you, and the occasional unmasking and punishment of miscreant management might augur, in the real world con artists usually get away with their crimes.

I am not suggesting that you just give up, but pick the right goals. There is a great quote that is relevant here: “When what you hear and what you see don’t match, trust your eyes.” For the investor, don’t fall for the trap of listening to opinions and forecasts and just accepting them. Force the management to provide conclusions instead of opinions, by linking what they are saying in a meaningful way to the regulated material such as audited financial statements and analyst reports. Furthermore, make sure that they give you a letter or transcript of what they said for your reference.

For the competitor the solution is not as quick. Thomas Paine said: “Reputation is what men and women think of us; character is what God and angels know of us.” Reputations can be manipulated and changed. Character cannot. Character is revealed by your actions, both as a person or a company, and how those actions accord with your stated core values. If you become known for your character then your stakeholders will always come and ask for your opinion when others speak of things that affect you. This protects you to some extent from false claims reflecting badly on you. Your character is not built over night, but is nurtured over the course of your life. Invest in it because it is of great value.

I have run into so many con artists in my life that doing a deep analysis into integrity every time I meet someone has become exhausting. I have therefore developed some rules of thumb to help me quickly evaluate the person. I call this test You might be a hustler (with apologies to Jeff Foxworthy):

  1. If you talk more than your share of the conversation, then you might be a hustler.
  2. If you constantly interrupt people and don’t let them finish, then you might be a hustler.
  3. If you are always changing your view of the future, then you might be a hustler.
  4. If you are always making excuses, then you might be a hustler.
  5. If you are constantly meeting with people but you are not in sales, then you might be a hustler.
  6. If you spend an hour talking and nobody understands what you said, then you might be a hustler.