Enron Testimony from a Fool
These things are worth digesting…
“To this day, the majority of stockbrokers are compensated on the number of trades their customers make, not on the returns they generate for them or on the quality of the advice they provide.”
“In the end, analysts have minimal structural incentive to be accurate in their predictions; rather their built-in incentive is to be as favorable to their corporate clients as possible.”
“The problem lies in the fact that analysts have a much greater incentive to focus upon the positive of a company than to root out the risks and the negatives, and their employers value their ability to generate investment-banking income much more than they do proper analysis.”
“The issue here is that the analysts who covered Enron, despite the company’s long-standing policy of withholding key information, and despite knowledge of the fact that there was an unknown level of debt being hidden from them in off-balance sheet SPEs remained nearly uniformly positive on the company until it was clear the company would collapse.”
“The Enron collapse is neither the first nor the most expensive loss of shareholder capital that came while analysts maintained cheery ratings on a company. It’s only by virtue of the fact that the loss on Enron shares has approached 100% for shareholders that made it the most noteworthy.”
“It is our genuine hope that investors seek to buy companies that they truly understand and would be willing to own for a lifetime. If there is one lesson that individual investors must learn from Enron, that is: Buy What You Know.”
My thinking on stocks? Don’t invest unless you really, really understand the company. Advice from other people is largely useless, financial news is mostly biased, and analysts are not looking out for your interests. Furthermore, diversification is critical; distribute your investments.
May 9th, 2005 at 3:54 pm
I strongly suggest that you consider index funds.
There are many reasons why index funds are better, but here’s the ultra short summary:
(1) Index funds tend to beat actively managed mutual funds in the long run
(2) Index funds generally have lower expenses
(3) Index funds are easy to understand; greater transparency
(4) Index funds are boring and therefore generate less stress
I’m not a financial advisor, but I still think index funds rock.