01/22/17
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How We Keep Fake News Out of Portfolios

This information is provided for educational purposes only, and is intended to be an example of how ArbitrOption applies its investment strategy. It does not constitute investment advice. As with all investments, there are associated risks and you could lose money investing. Prior to making any investment, a prospective investor should consult with her or his own investment, accounting, legal, and tax advisers to evaluate independently the risks, consequences, and suitability of that investment to their personal financial circumstances.Click here to subscribe to ArbitrOption’s Monthly Performance Update

Since the presidential campaign cycle, “fake news” has itself been a news item. The topic took on a whole new magnitude of interest with the upset in election results.

 

 
Of course, for the investing community, credibility of information has always been a crucial issue. Information is the single most valuable input in investing, which is exactly why its access is strictly regulated via insider trading laws. But even when information is public, we still have to verify its credibility.

In our strategy, the process of seeking credible information is particularly relevant. Our trades are based on an estimate of the likely timing and outcome of deals, details that in turn are based entirely on information. It’s so important that we have encoded it as a formal rule of our investment strategy: we won’t trade on rumors (either positive or negative). Our experiences have led ArbitrOption to develop a roster of sources for trustworthy information:

  1. Company press releases. Above all else, we prefer information that is straight from the horse’s mouth. Corporate press releases posted to  BusinessWireMarketWiredPR Newswire, or GlobeNewswire are trustworthy. In fact, they’re such reliable sources that hackers with a bent towards insider trading have stolen press releases from them.
  2. Original source documents filed at the SEC. Documents that are filed at the SEC are reliable and trustworthy, though you’ll need this Forms List to understand the information that is provided.
  3. Direct contact with company management. If you can get them to take your call, directors of corporate boards, company executives, and investor relations professionals can generally be relied upon, especially if you can confirm what they say with other sources. At ArbitrOption, we tend to discount what we hear in favor of what we read because a statement that is published has been vetted.
  4. Reputable news institutions and blogs. While we’d hesitate say these sources are always reliable or trustworthy, in the interest of knowing what others know we also monitor the  NY Times DealBook Wall Street Journal Business Section Financial Times’ Companies Section Barron’s, and  Seeking Alpha. Information that’s gleaned from these sources isn’t a basis for trading unless it can be directly attributed to a person with knowledge of the matter at hand. One of our preferred research methods is to use leads that are generated from these sources to get back to original material that meets the “trustworthy” standard. If a journalist at Barron’s cites a statement from the board of directors regarding their plans for a special dividend, we can dig into the SEC filings and evaluate the original statement ourselves.

 
Our strategy lives and dies by good information. As they say, garbage in, garbage out: if the inputs to our assessment of a deal are faulty, it won’t matter if we get the specifics right.

To learn more about ArbitrOption’s investment process, sign up here to receive our most recent investor presentation by email.