You are a hot young analyst-and your specialty is researching high-tech companies. You discover a firm that has patented a new process for turnng garbage into high-quality gasoline. The process works, is economical, and is easily scaled up-the USA could have plants running within a few years. This compony and its patenst will be worth a fortuen-what do you do?
Sell everything you have and buy as much of the staock as you can
Tout the stock to your clients
Keep the stock secret-till your wealthy uncle can acquire a controlling interest in the firm
What would you do?
How did you find out? There is a big difference between the cases where you had insider information (perhaps from someone in the company) and where your information is public.
You do realise that this company is already more valuable than France already? How much do you think you will be able to buy, on your analyst’s salary? What sort of return do you expect to get?
If you know that it works, everyone else knows it too. You won’t be able to get in on it fast enough. That kind of miracle breakthrough wouldn’t be under the radar. They’d announce and prove the tech, THEN go public with their stock.
Ok, im assuming that this hypothetical involves the situation where you have the possibility to buy the stock cheap, and the information is public for whatever reason.
That was clearly the point of this hypothetical so why get all nitpicky?
Disregarding all insider trading and buying a controlling interest laws:
No. I’d never concentrate my own portfolio. That company may have a great product, but perhaps the scientist who discovered the process is killed in a plane crash the next month.
Yes. I think I’d earn enough referrals from clients to retire within a year!
Nope. How’s that AOL-Time Warner merger working out?
I keep checking back here waiting to see if ralph had a point to this odd posting or any intent of making it into a debatable point. So far it just remains weakly fluttering like an empty windsock …
The only sure thing that there is no such thing as a sure thing. Your analyst may believe in his analysis, that he sees the diamond in the data that others have failed to appreciate, but he could be wrong, the information could be falsified, another company could have an even better process just about to be announced, there may turn out to be unforeseen untoward environmental effects that will result in the company being regulated out of competition, etc. A company like that is a speculative play. He can take out a sizable long position in the company himself, encourage Unks to invest sizably and tout it to his clients so long as he discloses his position and interests. If he really believes the data and his read of the market and the potential competition then it would be reasonable to make a good sized bet as part of a basket of risky bets. (The concept there is that one home run pays for several strike-outs.)
BTW my limited experience is that companies with potentially paradigm shifting products are rarely open to the average investor early on. Venture funds able to provide millions and perhaps a few other “qualified investors” can get in, and they do so presumably with full knowledge that the potential for higher return comes with some degree of higher risk. But the rest of us have to wait for the long anticipated and very hyped IPO.
Perhaps I did not explain the dilemma fully. You (as an analyst) are paid a salary by your firm. Your job is to research companies, and issue recommendations to investors, based upon what you learn. Your work is considered “intellectual property”-and (by the terms of your employment contract) is the PROPERTY OF YOUR EMPLOYER. You are NOT free to sell or profit in any way from this work-it belongs to your employer-not to you.
Now, you discover the n\”next Microsoft”-you know that whoever owns this stock will become fabulously wealthy-what would YOU do?
I’m not an expert on this, but I think the rule you’re talking about wouldn’t exist in real life. Analyst houses often own stocks of companies they research, and as best I can tell, individual analysts are also allowed to own stock in companies they cover.
At every investor event I’ve been to for the past 2 years, about half the start-ups are able to turn various forms of garbage of some sort into high quality fuel, albeit usually diesel. They are all economical and easily scaled up, and they all will be profitable even without government subsidies. In fact, every one that I have seen plans to have hundreds of millions in revenue after 2-3 years. One particularly energetic CEO informed us that if you did include the government incentives in his financial model, they could basically print money.
I realize I’m sort of ruining the hypothetical situation you set up, but I felt I should point out that finding companies that sound like they’re going to be insanely profitable is not very hard. How, as an investor or an analyst, are you so sure they’ll really do it?
But let’s play. He somehow has the crystal ball and really “knows.” His company wants its clientelle to be absolutely sure that none of its analysts are pumping and dumping, or whatever, and require their employees to sign a contract that they’ll take no personal positions in any stock they analyze or even trade on the basis of any information they acquire by virtue of being an employee and define the fruits of the analyses as IP owned by them.
Uh, he signed the contract, he agreed to the terms. No, of course he cannot buy it himself or leak the results of his analysis to his uncle.
But he can recommend that his company take a position on this stock, right? All the clients of his company, not just his, should get the benefit of this information. If he’s right, he should get a hefty bonus.
Under the hypothetical that would still be unethical and while IANAL seems to me like theft of IP. I would imagine that such is prosecutable and that the company could rightfully claim any proceeds from such an action as theirs. If he didn’t like those terms he shouldn’t have signed onto the contract.
Let’s make a more real-life example. A scientist works for a university and using university resources creates a patentable intellectual property of substantial value. Can he just quit and take his idea with him and effectively trade on it? Or does that piece of paper that he signed stating the terms of ownership of IP created by him during the terms of his employ hold?
It all depends on the terms of the contract. And on credibility determinations. If the contract provides that the university owns everything he does on their time, you can be sure he will claim that, oh, he made the discovery late at night, on his own time, albeit using their lab, or that he made it in his basement.