The guiding philosophy

The guiding philosophy of the investment business should be the maintenance of integrity. Without that, the hapless investor cannot be in a position to know what to do.

Last spring four major U.S. banks were fined more than $528 million for currency manipulation. It was fraud. Prior to that the Bank of America’s chief executive told his sales staff to go out and sell an item to customers despite the fact that it was a piece of junk.

It has become increasingly obvious that the corruption in the investment industry has become endemic. Unfortunately, companies are complicit in these shenanigans, as evidenced in companies’ earnings reports. Manipulation and deceptive practices should have been prohibited by the regulation of the securities commissions in Canada and the United States, but dishonesty prevails.

As the stock markets in North America climb, professional investors should become aware of the misleading versions of company reports. Examples abound of egregious fraudulent reporting. Nevertheless, financial analysts are supposed to point out this malfeasance, but they are negligent. They often play along instead of challenging phony numbers, as was the case during other eras of false markets enthusiasm.

According to John Turner, chief accountant of the U.S. Securities and Exchange Commission, companies are still stating false numbers that clearly did not conform to the situation. Now with stock markets at a multi-year peak there is a great deal of money riding on the assumption that the published numbers are sound.

A recent study by the Associated Press suggests the longer all this goes on, the greater the risk in markets. Companies make earnings look better than justified by leaving out things like costs related to laying off workers or the decline in the value of patents, or shares distributed to employees.  Unfortunately, most investors do not go to the accountants to examine company reports, but are willing to accept numbers that frequently are not really valid.

S&P Capital, a well-regarded research firm, stated the gap between company-stated profits and corrected bottom line has widened dramatically over the past five years of the current bull market – sometimes by as much as 50 per cent.

At the moment, given current market enthusiasm, many investors do not seem to care. When all this unwinds, it likely will trigger major upheaval in the stock market and business confidence.

 

 

Bruce Whitestone

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