On shares and rumours
There's an age old stock market adage which reads: "Buy the rumour and sell the fact." South African investors received a clear demonstration of the principle in action on 11 April 2007. The Goldfields (GFI) share price went on a roller coaster ride a
In a boom and bust scenario the Goldfields share price climbed as high as R152.50 almost 11% higher than its previous close before ending the day 4.03% higher. Apart from the obvious demonstration of the effects of market rumours on share prices, this debacle raises a number of more serious issues.
Prime amongst these is the responsibility of the media to confirm facts before releasing stories. Another issue is the staggering ability of media to drive trading activity on a large exchange. Questions will also have to be asked about the possibility of insider trading. Given current facts, we could not exclude the possibility that an individual or group launched this series of events for self enrichment.
Regulators in South Africa have taken a very serious view of the Goldfield saga. The Financial Services Board (FSB) will investigate further - as confirmed by Gerhard van Deventer a day after the debacle: "We will investigate for a possible contravention of section 76 of the Securities Services Act that prohibits false and misleading information being published."
Bloomberg news sent shares in Goldfields soaring!
The news that caused all the drama was released by the Bloomberg news agency. The story contained details of a takeover bid for Goldfields. According to these reports, a US financier known as Edward Pastorini intended to accumulate 10% in Goldfields as a platform from which to launch a takeover bid.
Writing for Fin24, Marc Hasenfuss made a very valid observation. No serious investor would announce their intention to purchase 10% of a group upfront. Instead, they would accumulate as many shares as they thought necessary over a period of time and then let the market and the company know of their intentions...
This is one aspect that should have been picked up by astute financial journalists. The second was the limited information available about the rumoured buyer, Pastorini. There are plenty of wealth individuals out there but the fact that this 'bidder' was unheard of in investment circles should have set some warning bells ringing.
Allegations of insider trading
More than 12 million GFI shares changed hands on the day the story broke. This volume is way higher than the average number of shares traded. There would have been plenty of opportunity for individuals who had prior knowledge of this story to make 'illegal' profits from their activities.
Insider trading is extremely difficult to prove and even more difficult to prosecute. It remains to be seen if the FSB finds any problems with trading activity leading up to and following the event. We assume the FSB will work closely with the JSE to make sure all possible avenues are investigated.
Act cautiously with un-tested information
The lesson to be learned here is fairly simple. Your approach to investment activities should go beyond simply investigating each opportunity before committing your funds. You should also exercise extreme caution with regards the source and accuracy of the information you receive.
Many investors have lost money after acting on questionable advice. You should be particularly cautious of sure thing tips from friends and family. In addition you should attempt to confirm the facts before investing your funds. Just because something is splashed around in the press does not mean it will definitely happen.
Editor's thoughts:
As evidenced in this article, many investors have lost money by making hasty investment decisions. This phenomenon is usually coupled with a desire for a short-term return. Do you have any examples of acting on 'rumour' and regretting your action at a later stage? Send your story to gareth@fanews.co.za.
