Fairies at the end of the garden?

On just one day during the sharemarket’s latest profit reporting season, the following headlines appeared on the website of a major metropolitan newspaper: “Brambles shares slump”, “Macquarie Airports slips into loss”, “US housing slump hits Hardie”, “Crown earnings no jackpot”, “Pacific Brands tips weak sales outlook” and “Nine’s losses tarnish profit”.

To be fair, there were three positive-sounding headlines. But you get the picture. When the market has been rising, journalists can draw more readers by pandering to the public’s greed with cheerleading headlines. And when the market’s been falling, they appeal to people’s sense of fear. Sensationalist reporting sells more papers and we all know it.

Combine that incentive with the fact that Fairfax recently announced the sacking of 550 employees, including a reported 160 journalists, and it begs a very important question for financial advisers. If your clients have exposure to direct shares, can they rely on the mainstream media to keep them reliably informed?

In my opinion, the editorial quality of The Australian Financial Review has been going downhill for a number of years and any comparisons with, say, The Financial Times in Britain are embarrassing. A less obvious but more insidious trend is the growth in the influence of public relations (PR) firms.

Advertising conglomerates STW Communications and Clemenger Group both highlighted the booming earnings from this area in their recent results. And, as journalists fall under growing pressure to produce content, they are becoming “processors” of content (from PR firms or newswires like Associated Press and Reuters).

I recently heard of an executive at a huge global consumer company asking their PR firm how much it would cost to buy a full page of editorial in a major metropolitan newspaper. While this was a clear misconception of the role of PR firms, it highlights the trend.

With particular relevance to investors, managers of listed companies, fearful of losing their bonuses, or perhaps their jobs, have become salespeople. Instead of shareholders being reported to as intelligent business owners, they’re treated as another “interest group” to be placated. In other words, many managers think their role is to tell shareholders “the good” while downplaying or ignoring “the bad and the ugly”.

I was flabbergasted when I saw our former Prime Minister reinforce this kind of ideology in an interview on the 7.30 Report in October 2005: “I think it is the obligation of senior executives of Telstra to talk up the company’s interest, not talk them (sic) down, and that is a view I have communicated very directly to the chairman of the board on behalf of the Government.”

A moment’s thought tells you that if a manager “talks up” the stock, then those paying the inflated price are being taken advantage of by those who are selling. It was a scandalous comment, given that many millions of Australians are net buyers of shares through their superannuation funds and, at the time, the Government was a large potential seller of Telstra. But nobody took up the cudgel against it.

Most modern media consumers now fully expect the facts, if there are any, to be coated in a thick layer of PR spin. It’s a necessary defensive mindset. So how can direct share investors work out what’s really going on?

Over the past seven years in my job I’ve spent a considerable amount of my time trying to answer that very question for our members. And while it’s not a simple task, I’d like to leave you with a couple of starters which might help.

The first is to search for information in diverse places. Don’t just read the annual report of a stock you own, for example; take the time to see what its competitors are saying. Are there any contradictory messages?

Secondly, you should worry about what you’re not being told. Take listed retailer Specialty Fashion, for example. Last year the very first point on management’s profit release for the year was “NPAT of $32.1 million, up $45.9 million”.

When this year’s announcement arrived, the first bolded point was “EBITDA up 7.3 per cent to $50.8 million”. After reading that, I’d have bet my car on net profit being down. And sure enough, it was (by an impressive 28.3 per cent, to $23 million, too). This was a classic example of the kind of spin which has become de rigueur today and the reason why direct share investors must be on their guard.

On just one day during the sharemarket’s latest profit reporting season, the following headlines appeared on the website of a major metropolitan newspaper: “Brambles shares slump”, “Macquarie Airports slips into loss”, “US housing slump hits Hardie”, “Crown earnings no jackpot”, “Pacific Brands tips weak sales outlook” and “Nine’s losses tarnish profit”.

To be fair, there were three positive-sounding headlines. But you get the picture. When the market has been rising, journalists can draw more readers by pandering to the public’s greed with cheerleading headlines. And when the market’s been falling, they appeal to people’s sense of fear. Sensationalist reporting sells more papers and we all know it.

Combine that incentive with the fact that Fairfax recently announced the sacking of 550 employees, including a reported 160 journalists, and it begs a very important question for financial advisers. If your clients have exposure to direct shares, can they rely on the mainstream media to keep them reliably informed?

In my opinion, the editorial quality of The Australian Financial Review has been going downhill for a number of years and any comparisons with, say, The Financial Times in Britain are embarrassing. A less obvious but more insidious trend is the growth in the influence of public relations (PR) firms.

Advertising conglomerates STW Communications and Clemenger Group both highlighted the booming earnings from this area in their recent results. And, as journalists fall under growing pressure to produce content, they are becoming “processors” of content (from PR firms or newswires like Associated Press and Reuters).

I recently heard of an executive at a huge global consumer company asking their PR firm how much it would cost to buy a full page of editorial in a major metropolitan newspaper. While this was a clear misconception of the role of PR firms, it highlights the trend.

With particular relevance to investors, managers of listed companies, fearful of losing their bonuses, or perhaps their jobs, have become salespeople. Instead of shareholders being reported to as intelligent business owners, they’re treated as another “interest group” to be placated. In other words, many managers think their role is to tell shareholders “the good” while downplaying or ignoring “the bad and the ugly”.

I was flabbergasted when I saw our former Prime Minister reinforce this kind of ideology in an interview on the 7.30 Report in October 2005: “I think it is the obligation of senior executives of Telstra to talk up the company’s interest, not talk them (sic) down, and that is a view I have communicated very directly to the chairman of the board on behalf of the Government.”

A moment’s thought tells you that if a manager “talks up” the stock, then those paying the inflated price are being taken advantage of by those who are selling. It was a scandalous comment, given that many millions of Australians are net buyers of shares through their superannuation funds and, at the time, the Government was a large potential seller of Telstra. But nobody took up the cudgel against it.

Most modern media consumers now fully expect the facts, if there are any, to be coated in a thick layer of PR spin. It’s a necessary defensive mindset. So how can direct share investors work out what’s really going on?

Over the past seven years in my job I’ve spent a considerable amount of my time trying to answer that very question for our members. And while it’s not a simple task, I’d like to leave you with a couple of starters which might help.

The first is to search for information in diverse places. Don’t just read the annual report of a stock you own, for example; take the time to see what its competitors are saying. Are there any contradictory messages?

Secondly, you should worry about what you’re not being told. Take listed retailer Specialty Fashion, for example. Last year the very first point on management’s profit release for the year was “NPAT of $32.1 million, up $45.9 million”.

When this year’s announcement arrived, the first bolded point was “EBITDA up 7.3 per cent to $50.8 million”. After reading that, I’d have bet my car on net profit being down. And sure enough, it was (by an impressive 28.3 per cent, to $23 million, too). This was a classic example of the kind of spin which has become de rigueur today and the reason why direct share investors must be on their guard.