The headlines in the business section often read like a crime blotter these days. We've seen one corporate executive after another accused of securities fraud, lying to investors and using company money to finance lavish lifestyles.
It's enough to make some people afraid to buy stocks. How can you be sure that the company in which you invest won't turn out to be the next Enron, Tyco, WorldCom or HealthSouth?
The short answer is that you can't. Investing in stocks always will entail risk. However, it's a risk worth taking if you believe that most companies are honest with investors. Think of it this way: You aren't trying to find the needle in the haystack; you are simply trying to avoid it.
Louis Thompson Jr., president of the National Investor Relations Institute in Vienna, Va., suggests a communications screen for evaluating prospective investments. He says companies that are open with investors and communicate how they conduct their business are less likely to be trying to hide something. That may be self-serving on his part since the institute is an organization for people who earn their living communicating with investors. However, Thompson makes a good point.
Here are things he says to look for:
Company statements and earnings releases written in understandable language, not so loaded down with legalese that investors have no idea what they mean.
A phone number investors can call to get answers to reasonable questions about the company. Even if investors own just a few shares, they shouldn't be ignored, he says.
A Web site that reveals something about how the company is run. That includes information about the board of directors and the principles that govern its decisions.
Disclosure of how the company determines compensation of its top executives.
"Investors have a right to be skeptical when you think of all these things that have happened," Thompson says. "There's a lot of trust to be rebuilt."
Of course the real test is not what a company says, but what it actually does. If it has to admit lying to investors or restate its earnings, it definitely flunks the communications screen.
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Q. The federal government has had two appropriations bills this year for more than $160-billion that will mean more government borrowing. Since that's the case, why aren't interest rates on money market accounts and EE savings bonds going up instead of down?
Your presumption that more government borrowing leads to higher interest rates is absolutely correct - all other things being equal. However, all other things are never equal. Interest rates are affected by multiple influences.
Corporate borrowing has been depressed because businesses were not motivated to expand in a sluggish economy. That should change as the economy picks up, putting pressure on interest rates.
On the other side of the equation, we've had strong investor demand for bonds and other debt securities.
Then there's Alan Greenspan and the Federal Reserve Board. The Fed has had a deliberate policy of keeping short-term interest rates low to try to help the struggling economy. If the economy starts heating up, watch for that policy to change.
And, of course, there's market psychology. Bond traders' expectations about the future, especially future prospects for inflation, play a big role in interest rate movements.
Q. I am investing money each month in the Putnam International Fund. It is not a large amount, but I am concerned that it may end up devalued before this mess with Putnam is over. Should I get out? Should I suspend my new investments until the dust settles?
If you are very concerned, pull your money out now. If you just want to be cautious, put your new investments elsewhere and watch the fund carefully. If it begins to perform worse than the average international fund, then pull the plug. The manager accused of inappropriate trading in this fund is gone, but declining assets could lead to deteriorating performance. The cautious approach is probably best if selling your shares would incur a tax liability or a redemption fee.
- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.
