As an investor, it's vital to check and double check your information sources.
Thomas Jefferson called information the source of democracy, but to an investor information is an important tool in the decision-making process (although sometimes it can feel like you're drowning in the stuff).
Some people are prepared to act on little or no information. Over the years I've come across many cases where people have invested tens of thousands of pounds on nothing more than a whim, yet the same people wouldn't dream of buying a TV set or second hand car without spending days considering their options.
Before you buy any investment you should perform a bit of due diligence upon that investment and remember that if something looks too good to be true it probably is.
Check the original source
Many investors like to evaluate shares by using websites that enable you to search for companies which meet specific criteria, such as a minimum by dividend yield and/or maximum price earnings ratio (PE). Newspaper financial pages can be a very good source for this kind of information and it doesn't matter if you spill coffee over them!
However, there is a major problem in relying solely upon these sources. The earnings figures which they quote can give a misleading picture because they usually include the profits from one-off sales (and this isn't pointed out to you) or because the P/E ratio has been adjusted to take account of interim figures.
Comparing these figures with those for similar companies is tricky because the data for the other firms may not have been updated and could be based upon last year's results. Similarly, when a company has cut or stopped paying dividends a data source will often use the last year's dividend and thus won't reflect this change.
A good example is Reed Elsevier (LSE: REL), a company which quotes two very different figures for earnings per share and thus has two P/E ratios.
Conventional accounting standards force Reed to depreciate goodwill and charge this against its profits. However, Reed argues, as do many investors, that goodwill which relates to an ongoing business which has not suffered any impairment should not be depreciated. This produces a much higher adjusted eps figure because the goodwill write-off is added back.
Reed's 2008 accounts thus quote two eps figures, 22.1p reported and 44.6p adjusted. Can you be sure that the P/E figure quoted in the newspaper is using the statutory eps? It makes a huge difference!
Check out the original source wherever possible.
The company's website
The best way to get information about companies is to check their websites. Most companies will have a website; if the company doesn't you might like to wonder why. There's usually a separate section called "investor relations" but because many companies rightly see their websites as a tool for customers and potential customers, it can be a little bit tricky to find.
For example, Tesco (LSE: TSCO) has its main website here but there's no sign of a link to the investor relations site from the main page. You wouldn't do your shopping at Tesco without making a few comparisons between products so if you're thinking of buying Tesco shares you should really have a quick peek at the most recent accounts. The investor relations page can be found through the site map link here.
Don't be one of those investors who never looks at the annual report; doing so could save you from making a big mistake.
The Regulatory News Service
A really useful source of accurate and up-to-date information is UK-Wire's regulatory news service. This emails you whenever a company makes an official announcement to the London Stock Exchange; it's free and incredibly useful. You can find it here.
Don't be the sort of investor who thinks that something is news only if it appears in the finance section of a broadsheet.
Spotting bad information
A really useful skill is spotting misleading information. Unfortunately this takes time, but it improves with experience. In recent years it has become quite fashionable for share analysis to use "EBITDA" which stands for Earnings Before Interest, Tax, Depreciation or Amortization. But for share analysis it's a dangerous tool and should be chucked in a skip!
EBITDA was developed for lenders as a quick test as to whether the business is generating enough earnings to pay the loan interest. EBITDA is very useful for lenders and bondholders because loan interest is paid before tax (and offset against tax) whilst depreciation and amortization are non-cash costs which appear as reductions in asset valuations, rather than take cash out of the business.
But for shareholders EBITDA is an extremely misleading measure because it makes a company appear to be more profitable than it really is. This is because by leaving out four major charges against profits the "earnings" are much greater but this is similar to assuming that your food and housing costs don't come out of your salary! These have to be paid for just like depreciated equipment has to be replaced.
So if you ever see EBITDA being put forward as a reason to own shares in a company remember the advice of Warren Buffett who said that EBIDTA only makes sense if you think capital expenditures are funded by the tooth fairy!
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