The Importance of Due Diligence

Dear Readers,

I owe you an apology.

As you may know, at Resource Investing News, we pride ourselves on our unbiased editorial content. We do not write overly promotional articles urging investors to buy specific stocks, and, most importantly, if a piece of content on our network falls into the category of paid-for content, we disclose that information. Our goal is to help educate our readers about what is going on in the market and about the small-cap companies operating within the resource sector. That being said, we also do our best to be diligent in our own reporting, aiming to stay away from blatantly biased and paid-for stock promotion. It is on that count that we — more specifically, I — recently failed you, and for that, I’m truly sorry.

While normally I would be very excited to receive a call from The Wall Street Journal, this week’s call drew my attention to an article published in March on Potash Investing News that was not as unbiased and independent as I had originally thought. As a result, I was forced to learn a long, hard lesson in due diligence, disclosure statements and just how easy it is to be misled.

Reader beware

Performing due diligence should be almost second nature to anyone seriously considering putting money down on an investment, especially in the age of the internet, when anything can be posted anonymously and investors are constantly flooded with information from numerous sources. Understandably, it can be difficult to know who is right and who is telling tales.

The lesson I learned this week was that the “boring-but-necessary” paragraphs at the end of analyst research are not always boilerplate information. Disclosure statements are added for a reason, and they can be the first indicator of the actual purpose of the information being presented.

For instance, a disclosure statement might unveil that the research has been paid for by a third party that is also a shareholder. If that is the case, it is very likely not unbiased. For starters, the shareholder will directly benefit from any uptick in stock prices, and, furthermore, this “pseudo-independent” research is likely not being written with the interests of long-term investors in mind. Investors who are looking to benefit from intraday trading activity will, however, appreciate the heads up about a stock on the move.

It’s important to understand that although not all research is paid for, in the vast majority of cases, there is likely going to be some kind of bias. Once the bias is clear, it is easier to navigate through the information.

Unfortunately, disclosure statements should not be the only stop when doing due diligence.

As Seeking Alpha recently highlighted, disclosures are not always honest. In Seeking Alpha’s case, the authors “skipped” the part where they disclosed being paid by investor relations companies for their articles. That emphasizes the importance of not taking all information found on the internet at face value.

What does this mean?

Not to go all Mulder and Scully on you with warnings of “Trust No One,” but I cannot emphasize enough that any second-hand information on stocks should always be taken with a grain of salt. Paid promotion of stocks is characteristic of the investment industry, and investors need to recognize that.

Do your research, reach out to the companies you are interested in, look at financial statements on SEDAR and use the media as a stepping stone, not the gospel truth. Because as I’ve just outlined, not all information is transparent.

As for how this relates back to Resource Investing News, we will try our best to do the same and keep delivering the independent, unbiased editorial you have come to expect.

Thanks for keeping us (me) on the straight and narrow.

Happy investing,

 

Vivien Diniz, Editor
Resource Investing News