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I'll let you in on a secret: insider info is bogus

So the SEC is investigating analysts who peddle “channel checks” for violation of securities laws. Former SEC chairman Paul Atkins summarizes the law as follows:

“Insider trading basically comes down to where you know or ought to know that the person from whom you’re getting this information has a duty to someone else to keep it confidential. If you go in and pay the mail clerk to give you special information, that’s not proper.”

This is perhaps newsworthy. But the real news is that information that comes from sources that cannot be verified should not be trusted and certainly not valued.

Here’s why: if someone holds information that is non-public they automatically treat it as more valuable. It’s more valuable because it’s not something everyone has. It’s not valuable because it’s accurate. By definition, that accuracy cannot be proven so the assumption of its value is based entirely on exclusivity. So valuable perhaps that you can even sell it, and surely many do.

However, simply not being public makes is no more likely to be accurate. You have a situation where people ascribe more value to something that is equally (and sometimes even more) inaccurate as background noise.

Beware of anyone offering non-public information to a larger audience. The data and the person’s ethics are both suspect.

The proof comes every quarter: those who rely on inside info are no better and often worse in predicting fundamental performance.

  • jjj

    I think your argument might be more valid in your space (mobile/tech) but less in others. In some industries, there isn't much public information available to analysts and these consultants/expert networks provide that information. Once investors are provided with that data, a lot can be left for interpretation to the investor/researcher (i.e. different hedge funds can come up with different POVs on the data). That's why, as you say, those who rely on this info are no better or worse– because it still takes skill to analyze and interpret the quality of the information. The issue is with these consultants/networks is that there are shades of grey and some are not ethical.

    So to summarize, there's value in the information from some of those expert networks but it still takes skill to interpret. There are shady players in the industry that push the envelope to compete. This sort of situation always leads to bad things in finance so it should be regulated.

    • asymco

      The data is most certainly fragmentary and inconclusive. But I would still argue that it's just as likely to mislead. People will attach too much value to these fragments in their analysis and it's very probable that they are not accurate. For example, build plans change frequently, suppliers change and people are incentivized to exaggerate the importance of their secret knowledge.

  • Russell

    Horace

    a list of quotes i keep in my desk.

    "Beware of insider information……..all inside information. Jesse Livermore

    " With enough inside information and a million dollars, you can go broke in a year". Warren Buffett

    Perhaps inside information could "potentially" benefit an investor if you were sold on a particular investment regardless of any " inside info" and were increasing your investment in increments over time.

    The timing of an incremental investment could perhaps be timed with the info. It could enhance your upside. Your downside risk is limited and tied up in your fundamental, longterm view of the investment regardledd of the latest insider inforamation. If your wrong about the big picture you could be toast, but the inside info doesn't do it to you.

    ok i"ll shut up now so that the group can pulverize the last two paragraphs.

    Russell

  • jjj

    Yeah, I know the large funds have entire departments that manage outside research so there are processes set up to measure data quality and optimize the information they buy. Perhaps they include the grading of data quality as part of their overall stock picking skills.

  • Giogio

    You have to process info. You have to spend money to process it.

    More accurate data, more money involved, should provide more accurate decisions up to the point where investing more money is meaningless due to the uncertainity of the data you get.

    If you process insider information the same way you process any other info, they can do no harm, they are just info with their degree of confidence, but then, why pay for them?

    If you think they are more valuable, you can pay for them, but why should they be more valuable?
    Not for the fact that they are not public, I agree, but source is an important classification for information.
    You always have to pay to acquire more reliable data, think about more precise statistics, why not pay to get a more valuable source?
    You can always bind trust and results of a source and stop acquiring if it turn out to be not so trustworthy, but if in time it reveals itself as a useful source of insider accurate information, it is a valuable source that can share part of the money you use to process information.
    The process of information acquisition must be controlled for violation of security laws becouse it could be useful to buy insider information, expecially if you can contact a source that proves to be accurate in time.

  • r.d

    Is it legal to spread false rumors to manipulate Apple stock
    whether they are getting inside information or not?
    Will SEC ever do anything about it? not.
    With unethical journalist and hedge fund manager and analyst,
    I don't think this will deter them.
    Short seller have to eat too.
    Obviously the information was wrong, it was just designed for short term effect.
    why you would look for it for future prediction is ridiculous.

    • kyler

      Exactly! These guys are exploiting the secrecy of AAPL as means to spread their version stories to influence the market so that the people "in the know" can profit from the short term stock price swing as a result of spreading the stories. A new definition of insider trading, I guess.

  • Alexkhan2000

    I find the whole AAPL stock price speculation and analysis that's flooding the web the least interesting of following what Apple is doing. There's just a total overload of regurgitated rumors and speculations that it's becoming quite a chore to filter out the useful info from utter gibberish.

    That's on top of having to weed through overly-biased analysts' reports (both pro-Apple and anti-Apple) that are poorly researched and hastily written with typos and bad grammar. And then there are all the forum comments that are reminiscent of juvenile sports fans arguing over how their favorite teams and players are doing. Sad to say, Apple has a become part of a growing tabloid culture dressed up as "serious" financial and tech journalism.

    It's obvious that there are traders (as opposed to long-term investors) who are looking to cash in on short-term dips and peaks that AAPL is subject to. It seems these people are just guessing for the most part, looking for quick gains and sell-offs or short sales based on unsubstantiated rumors. I can easily envision various schemes being hacked together by the traders and some of these psudo-analysts to get these rumors going on the web and manipulate short-term volatility. I'm all for the SEC cracking down on this kind of…uh… crap.

  • Alexkhan2000

    I wanted to add another point regarding the "channel checks" that analysts brandy about in their reports. Having worked as a supply chain director for finished OEM goods in a fairly large musical instruments company for 10+ years, I have a good understanding of how long supply chains from Asia to the US work. The industry I'm in is small, almost minuscule, compared to the tech/CE industry. Even in my position of going to the manufacturing base in China and Korea every 2~3 months over all these years, it's very difficult to get accurate info on what the various factories are doing in terms of how many and who they're building for.

    So to think these analysts sitting in their offices here across the Pacific can "sic" some low-to-mid level contacts to get accurate info on what's really going on in this humungous industry is laughable at best and rather disturbing when you think about the influence that such "info" can have on the stock price of the world's second largest company by market cap. I wouldn't be surprised if some of these numbers are just pulled out of the blue – outright made up not by the analysts, but by their so-called sources in these "channels" they seem proud to be privy to.

    We see time and time again how far off these analysts tend to be. It's really funny to see how some of them keep going and going after making predictions that turn them into laughing stocks on the Internet. I suppose having a really thick skin is one of the prerequisites of holding onto their jobs. It's often as though they're just shooting wildly in the dark to make some outrageous prediction that will hit the bullseye eventually and cement their reputation in this weird business they're in.

    I'm sure this is not the case for the majority of the analysts who are well qualified to do what they're doing. But this is a competitive field as well and some of them seem rather desperate for attention – posting sensationalistic headlines over and over again to stand out from the rest by proving that they can see things that others can't. Yes, the Internet is full of Jobs-like visionaries who will change the world and give us everlasting peace… Fortunately, there are enough down-to-earth and level-headed analysts around who are worthwhile for us to track down and follow through all the other riff-raff.

    • asymco

      Putting motives aside, the problem is that relying on fragmentary insider data in lieu of solid analysis usually leads to worse performance. Imagine however the plight of most high level managers who have loads of inside info. Their judgement ends up even more clouded because they think their information is more valuable than what is in the public domain. So much so that they routinely ignore public domain info. I've seen this happen.

  • berult

    There comes a tipping point in a neck breaking success story whereby a decoupling occurs. The metaphysical dimension of a product, the mythical object, parts with its weight in Gold, actual units sold. It releases itself from parental hold like any mature offspring would, hopefully without prejudice to the grieving genitor. It carries the genes of success, but lingers on a life of its own.  

    Apple's mindshare holds Court, market share holds sway. And they're both coming to dinner, …their own separate way.