With the rise of data warehouses and increasingly sophisticated information networks, keeping a secret is becoming increasingly difficult. Hedge funds use financial brokers to act as a proxy to keep other investors from knowing about certain financial trades. While this is great for competitive business this is not terribly comforting for the consumer and for good reason.
As a kid I remember watching the people on the news who lost money because they invested their life savings into Enron and thinking: "how could anyone be so stupid"? But the answer it turns out was pretty clear: they didn't know any better. And to be perfectly honest I bet no one could have predicted the kind of mess that Enron would get into. Even an informed investor, while able to minimize his losses, would not have been able to predict the internal actions of the executive board.
I had class that visited Fannie Mae just as the whole sub-prime mortgage crisis was going on and when one of the students asked about how such a crisis would affect the company, they said that the matter was unrelated to their business. Several months later Fannie Mae is under government control. My simple question is how healthy is it for companies to withhold information when investors decisions rely so much on consumer confidence?
There seems to be a catch 22 when it comes to building up capital and building up investor confidence. Individuals will only invest in a company that they think is going to succeed but in order to get to a successful place one must have a successful product. Either way, there is a good chance that a barely successful venture will have to oversell itself to raise the funds necessary to "make it" in today's market.
In the past investors had less access to instantaneous information as they did in the modern times. As a result there was less oversight and more independence/innovation. With more access to information, investors can make more calculated decisions and the pressure to succeed is even higher than before. In some cases this is great while in other cases I feel as if this is a harmful for the overall equilibrium in the marketplace.
Successful companies do very well while failures crash and burn harder than ever before. One example of this phenomenon can be spotted in the startup industry in Silicon Valley. Investors often have little knowledge of new web 2.0 business strategies. What little information is often exaggerated in the blogosphere and thus companies who are looking for investment money will often have to display a high amount of confidence to pull off a successful sell.
As a result, many of the companies that started off failed outright and lost investors a good deal of money. These risky expenditures could have been possibly reduced if companies were more realistic about their expectations not unlike the housing market debacle.
While I don't see any quick solution to this problem, I can say that this problem will be solved through a change in business culture. There needs to be a less of a "winner-take-all" mentality when it comes to investing and people will take appropriate risks when necessary.
http://www.istockanalyst.com/article/viewarticle+articleid_2500051.html
http://money.cnn.com/2008/09/07/news/companies/fannie_freddie/index.htm
1 comment:
Although you make valid points as to why company information should be made public, I believe it should be limited and sometimes eliminated from thw public eye. I say this for the simple fact that the common investor does not have a vast knowledge of the dynamics of a companies financial statements and ratios, is very risk averse and as a result, panics to negative news. For example, a net loss does not necessarily mean the company is not a good buy. If the loss is above analysts estimates, it may be a good buy. The common investor or public may not interprete the loss in this way.I believe the best solution to solid investments is going through a professioanl,such as a broker or a trader, and blame should go to these people and not the company.
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