On Wall Street, information is power. Investors increase their potential to profit by knowing more than the person on the other side of each transaction. But some unscrupulous folks don't stop at simply gathering better intelligence. They aim to cash in by spreading lies that mislead and misdirect ordinary investors like you -- making themselves rich at your expense. With persistence and a little know-how, you can protect yourself, your friends and family, and your money from making these kinds of costly mistakes.
"Show me the incentive, and I'll show you the outcome."
-- Charlie Munger. (Note that while numerous articles attribute this quote to Munger, we couldn't find any direct, verifiable citations for its original source.)
Once you've figured out where your information's coming from, you next need to ask who stands to gain from it -- and what they stand to gain.
Consider this very article you're reading. Why are we writing it? Well, as human beings and investors, we care about making good decisions, and we think the world will be a better place if more people learn how to tell fact from fiction. But we also hope that if we give you good, reliable information, we'll earn and deserve your trust, and eventually you'll want to subscribe to one of the newsletter services from which we make money. (If you're seeing ads on this page, we're also hoping maybe one of them will interest you enough to click on it; we make money that way, too.)
Knowing more about why we're doing this can help you figure out whether to trust us. It probably helps -- we hope it helps! -- that we're not trying to use this information to directly ask you to give us money. That said, if you get to the end of this page, see our pitch for a free report or a newsletter service, and decide you want to buy something from us, we certainly won't complain.
Apply the same thought process to every information source you encounter. What are they selling? Why are they selling it? Who's buying? This process can't necessarily tell you whether or not to trust a source, but it can give you clues about how much you should trust a source.
1. Will the source of this information benefit if you act on it?
Are they more or less likely to benefit than you are? More importantly, what and how much do they have to lose if things don't go their way? The wealthy tech tycoon urging you to plow your savings into a risky momentum stock probably won't go bust if the investment does -- but you might.
2. Does the source of this information have a financial stake in what it's discussing?
This could include writers discussing stocks they own, or companies paying for research that flatters their own business or attacks their competitors. If they do have a financial stake or a conflict of interest, do they disclose this information or try to hide it?
3. How does the source of this information make money?
- Does it sell advertisements, and thus just benefit from getting people to pay attention to it?
- Does it sell subscriptions? That might imply -- but not guarantee -- that it wants to build trust with readers for the long term, so that they'll keep coming back and paying it money over the long haul.
- Is it selling you -- your data, your preferences, your information -- to advertisers? If so, it may focus more on presenting you with things that grab your attention than on things that are true and accurate. Social media and video-sharing sites run on algorithms that emphasize engagement. They show you things that they think you'll want to click on and interact with, even or especially if those things inflame your emotions, and often without much or any regard for whether those things are accurate.
- Does it rely on its reputation to make money? If people come to this source of information because they know they can trust it, it may have a greater incentive to tell the truth.
- Does it sell an identity? Does it try to make money by making readers feel like part of a group of people with aligned values and interests? This isn't always bad -- it's the reason we encourage you to think of yourself as a Fool! But in these cases, think carefully about the values and interests the source promotes, and whether the group it's trying to get you to identify with defines itself by trying to bring lots of different people in, or keep certain groups of people out.
- Has it already gotten paid up front -- i.e., an analyst report, an academic paper, or an SEC filing? If so, who paid for it, and what agenda might they have? An independently reported news story of internal turmoil at a company might have less of a reason to skew or shade the facts than a professional short-seller's report on the same. A study commissioned by a private company about its product's benefits might reach different conclusions than one conducted and funded by a neutral third party.
- Can you tell what it's selling at all? If you can't determine a source's incentive, again, you probably shouldn't trust it.
4. Has anyone else double-checked this information?
Scientific papers go through a process of peer review. Other researchers check the methods the paper used in search of flaws, and sometimes try to replicate the experiment themselves to make sure the reported results are accurate. Similarly, public companies' filings with the Securities and Exchange Commission get double-checked by a company's accountants and auditors to make sure all the numbers line up.
5. What does the source have to lose if it's wrong or lying?
Everyone can and does make mistakes, even journalists and analysts. But what happens if they out-and-out lie? Newspapers can face public shame and scandal -- and lost subscription and advertiser revenue -- if they report made-up stories. Companies that lie to the SEC can face shareholder lawsuits and legal trouble. And even the most partisan TV channels can be cowed into accuracy by the threat of serious legal action. The more a source has to lose if they don't tell the truth, the more trustworthy they may be.
6. How honest is the source about its incentives?
Sources of information rarely come right out and say, "I have X to lose and Y to gain from this." But if they do -- and if those assertions line up with the available facts -- it may make those sources easier to trust.