Investors beware

PUBLISHED : Saturday, 15 June, 2002, 12:00am
UPDATED : Saturday, 15 June, 2002, 12:00am

The Securities and Futures Commission wants to tighten up the regulations over research done by stock market analysts. Without giving precise details, it is saying it will watch how other markets deal with the issue, before deciding what is appropriate in Hong Kong.

The charge sheet some analysts face is that, through poor research, they inflated a stock market bubble in the late 1990s by recommending people buy shares in companies which had no prospect of making a profit.

When the stock market bubble burst, the shares collapsed, and investors were left nursing huge losses. A more serious charge is that analysts working for big investment banks actively promoted stocks they knew to be bad, in the hope of gaining lucrative deals from that company for their employers.

Countries around the world are now grappling with how to deal with this issue. Ideas that have been floated include ordering banks to separate their research arms and toughening up the penalties for those found guilty of market abuse.

All the proposed remedies are worth examining, both in Hong Kong and elsewhere, but there is something else that is probably more important.

Too many people were too willing to believe that the rules of economics, particularly as they related to company performance, had been rewritten. A firm did not need to be making a profit, or even have a sound business plan it seemed, it just needed a vague idea about future earnings and a trendy name.

It wasn't that there were a lack of signals about a bubble in the making. It wasn't just Alan Greenspan warning about an 'irrational exuberance' in share prices. The frenzied scenes that greeted the share offering in early 2000 should have warned investors to beware.

While regulating analysts may be important, investors also need to look at their own behaviour if they are not to get burned again. They should look at the hard facts behind a company, look closely at its quality of management, track record, and future plans. Don't be taken in by a flash name, or a gimmicky marketing ploy. And beware what a company says about itself. If a deal looks too good to be true, it probably is.