Monday, October 15, 2007

Correcting the good-news-about-stocks bias of the media

Jayanth Varma has long emphasised the importance of the short seller in upholding market efficiency. He points to many episodes where speculators have ferreted out misdeeds of firms, taken up short positions, and then brought the bad news to light in order to profit from it. Short selling, then, generates incentives for external parties to place constraints upon firms who are falsifying information and obtaining an exaggerated valuation.

Writing in Business Standard, Devangshu Datta led me on to a fascinating website called http://www.sharesleuth.com. This operates on a very interesting business model:

  • There is a trader named Mark Cuban. He funds Chris Carey, who runs the website.
  • Carey discovers firms doing bad things.
  • First, Mark Cuban gets an opportunity to short sell the stock.
  • Then, Carey goes public with the facts that he has unearthed.
  • If Carey is right, the stock prices drops in response to his revelations, and Cuban makes money.

We need a few of these in India. At present, there is too much of a long-only bias in the media. The media has always had to worry about making advertisers unhappy. In addition, an extremely unhappy development in recent years has been the systematic equity investments in certain firms by one massive media house, which then goes on to shamelessly trumpet the virtues of these firms.

4 comments:

  1. Most of the Indian Financial media is a joke (except for perhaps Business Standard)
    As a long term and patient Indian investor based in the US, I deeply cringe that there is unfortunately not a single outlet that reports good financial information (the ndtv profits, moneycontrols etc of this world are but chat zones with stupid comments and banters - the user generates the content and these websites lap up the google adsense dollars)

    Alas even in the US, the business news channels are woefully inadequate and Cramer makes for more stupid entertainment than news...(Fox too may be no diff when they start tomorrow)

    I think you are right that a great outlet is sorely sorely needed in India - first of all to talk free markets and offer strong opinions and secondly to talk genuine financial knowledge - not some hokey pokey stock market banter.

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  2. Maybe short selling provides an incentive for firms to reduce falsifying of information for exxagerated valuations. But I think there is an ethical issue here. On balance, better discloure practices is the answer. Similarly for the long bias, again better disclosure, educating investors ( herd-mentality issues)is still the better option even though arduous.

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