It is clear that market regulators have not been able to contain the excesses of manipulative hedge funds and active investors and now they are starting to go after each other. Some of the most dangerous sharks stirring up the water might learn to be less aggressive in their attacks, but some of us smaller fish will get badly bitten while the big boys are snapping at each other.
Most recently in the news with a stock price rapidly rising then falling is Valeant Pharmaceuticals. Pumped up over the last five years by Bill Ackman of Pershing Square supporting their aggressive growth by acquisition plan, the stock is now being trashed by Andrew Left of Citron Research for artificially inflating reported sales revenue. Ackman has lost over 50% of his investment in the last few months.
It is not clear yet which investor and which of their very public cries of support or criticism are correct. But the stock manipulation effects are clear. Unfortunately, small investors are faced with choosing who will move the stock price and in which direction, rather than valuing the stock on its merits. The next press release will have more impact on the stock than the next earnings report.
This is not the way the market should work, but if selling short is acceptable there will always be an incentive to push the stock down with rumours and innuendo. Just as there has always been an incentive for promoters to paint a rosy picture to sell new issues or protect their current holdings.
I would like to think that research analysts are getting better at digging deeper and presenting the facts fairly and independently, especially after all the criticism of too frequently optimistic reports and recommendations. Unfortunately, there are still too many conflicting interests for us to even rely on the consensus estimates of the analysts. Not to mention the fact that some are driven by ego and the thrill of influence, regardless of their lack of insight or the validity of their critique of management and business strategies. How many analysts have actually been successful CEOs in the business they are criticizing?
If you are making your own investment decisions, you will have to do your own analysis and assessment of whether to buy, hold or sell. As Harvey Mackay would say, “Learn to swim with the sharks without getting eaten alive”.
Enjoy the swim.