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Through a clear glass

Clear and transparent availability of market information has led to the genuine democratisation of equity investing


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If you own stock in a company, do you have a right to know it's financial data? In this day and age, the question sounds ridiculous. Companies that are listed on the stock market have to reveal extremely detailed financial data and everyone has access to it. However, this wasn't always the case. Till at least the 1920s, at the time when the American stock markets first went through a huge bull run and then the great crash of 1929, investors had no right to know a company's finances.

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That sounds unbelievable today. Shares were issued and stocks bought and sold on rumours and hearsay alone. The main reason that one stockbroking firm may be preferable over another was often the quality of information that was available with it. Brokers routinely employed researchers--spies would be a better word--for surveillance of factories and estimate basic business data. The only form of information was insider information and the only way to trade was what we call 'tips'.

How strange all this sounds today. Or does it? I can imagine experienced Indian equity investors reading that and shaking their heads at how innocent and uninformed I sound. Why talk about America of a hundred years ago, they must be wondering. This is exactly how we used to do equity 'research' in India at least till the mid-90s. Of course, in India of twenty years ago--unlike the US of 1920s--companies were obligated to release financial data publicly. And they did do that. However, the trustability of that data was pretty variable.

In fact, stock prices had what could be called a trust premium or discount. For example, there was an MNC premium, which was mostly because you could trust the numbers. There was also a south premium, although that dates further back than the 90s. Investors believed that South Indian promoters were less likely to fudge numbers. There were also premia or discounts for other ethnic or regional communities but let's not discuss that. At the end of the day, the stock markets did not trust the data that was released. Physical verification was an integral part of stock research and just like in the US a century ago, it was entirely possible that a business that looked rosy on paper was in a very different shape on the ground.

However, that was then and this is now. Over the last year or so, in the process of evolving Value Research Stock Advisor, an old fogey like me has often wondered at the enormous improvement of transparency, data quality and data availability compared to when I started investing. Now, it is entirely possible to do very high quality investment research without going outdoors, in a manner of speaking. The best quality data and information is not free--far from it--but it is available online.

That's about availability, but the trustability is also fairly high. Among the largest 500 or so companies, it would be exceptional for any broad numbers to be fudged in any major way. If there is any attempt to game the accounting, it isn't difficult to detect its likelihood in a systematic data-driven way, as in the Modified C-Score system that Value Research has evolved from James Montier's C-score system. The bottom-line is that equity research and equity investing are available to everyone, and not just those--as till the 1970s--who can send station spies to count how many trucks are exiting a factory.

This democratisation has created a virtuous circle. As more and more people invest in equities--either directly, or through mutual funds--the pool of investors who have a poor experience because of bad information quality gets smaller and smaller. Unfortunately, the same cannot be said of what the intermediaries are doing but that's a separate story.

The ideal situation would be one in which investors may do badly, but only because they themselves took bad decisions, and not because they had bad information. We're not there yet, but are a lot closer to it than we were in the past.

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