A growing raft of lie-detection technology and a body of research offers some insights into when people are lying—and a whole new cottage industry of experts is springing up to apply those lessons in intonation and word choice to the financial sphere.
Peter Dazeley | Getty Images
"In four or five years it will be impossible to lie," said Salim Ishmail, former head of innovation at Yahoo and founding executive director of Singularity University, speaking at the Exponential Finance conference in New York recently.
But experts caution that investors should take it all with a grain of salt and consider the new insights as one more tool at their disposal for evaluating stocks and the markets—but one of the less definitive ones.
After all, philosophers have been debating about the definition of a lie for millennia. And the question of how bad a lie is (or how bad it is for a company's stock) is open to interpretation.
Read MoreApple Music: What you need to know
For instance, is it OK if a CEO tells a white lie? And might there be some situations when the success of the company depends on having someone who is overconfident, right up to the verge of lying?
And while some of the new tools and research are intriguing, they're by no means highly accurate.
"If someone tells you that they are 90 percent accurate, run for the door," said David Larcker, a James Irvin Miller professor of accounting at Stanford University's Graduate School of Business. "The early results are useful but crude."
If you're listening for a lie in a conference call, what can you be on the alert for? Though there aren't many ways for individual investors to take advantage of the new tools, there are some insights from research.
Larcker published a paper five years ago that looked at the transcripts of thousands of corporate earnings calls and then compared the ones made by CEOs who later were found to lie (people like Sanjay Kumar of Computer Associates and Kenneth Lay of Enron; they were both convicted of securities fraud).
Read MoreInsider trading: CNBC Explains
Along with graduate student Anastasia Zakolyukina, who collaborated on the research, Larcker found some markers, but he hurries to say that the markers, among others, show up in "lies" only a little better than half the time. In other words, it's not exactly like flipping a coin, but it's close.
They found three signs of a lie:
- Failure to directly answer a question. For instance, Kumar answered a question about whether the company's books could be trusted by providing an assurance about the quality of the auditor.
- Using words like "my team" and "we" more than "I."
- Using exuberant words, like "amazing" or "awesome."
If those indicators sound familiar to you, you're not alone. There are plenty of people who are good at detecting lies on a one-on-one basis. But now the technology exists to replicate what humans do on a large scale and give it a systematic approach.
Many hedge funds and institutional investors are making use of the new technology, sending CEO statements and other company communications through algorithms that do everything from examining intonations to analyzing word choices and comparing statements to management letters.
"Everybody is looking for an edge," said Larcker, adding, "Any communication that is coming out of a company now is being subjected to linguistic analysis."
Companies, like New York City-based research firm Valens Securities, uses algorithms that can analyze massive quantities of data. Valens sells forensic accounting to institutional investors and fund managers to supplement its securities research.
Its process feeds in the records of conference calls and feeds out an analysis that looks like an EKG, mapping 15 different markers that have to do with either strong negative or positive emotional effect. It's looked at 18,000 conference calls.
The markers help Valens decide whether a CEO or another member of the management team is overconfident or underconfident about a particular business situation.
For instance, Facebook looked expensive late last year. "When we ran the earnings call forensics ... management showed high levels of excitement. They were very confident in what they were saying."
The stock was trading around $75 in the last two quarters of last year; it's now up around $80.
On the flip side of the coin, Valens said, Google executives have been displaying doubt in their conference calls.
"There's hesitation and the way they are changing their tone. ... We're getting these highly questionable flags."
In particular, Valens said, Google CBO Omid Kordestani was particularly hesitant about the company's conversion to mobile and how much it would damage the companies that rely on Google; Valens flagged him for downplaying the extent to which non-mobile-friendly content providers will be penalized, and overemphasizing the boost to e-commerce expected to come from mobile.
CEOs' emotions are probably particularly important for tech companies, especially those that have only short track records and whose stock price is almost entirely based on potential—like Tesla.
Litman said that when the emotional signs read red for both CEO and CFO, it has always been a sign that the stock is going to hit troubled waters.
But as for how accurate the process of sussing out lies is in general, there's no clear answer. Just as most investors wouldn't use the content of a conference call alone to make a buy/sell decision, you wouldn't use these kinds of technologies.
The fact that technology promises to detect lies now is seductive, but smart investors shouldn't be oversold.
Still, what does the compilation of conference-call emotion say about the overall direction of the market?
"Our research signals very strongly suggest a continuation of the bull market albeit with possible sideways movement. ... However, management teams seem to have little confidence in growth nor in new initiatives. That suggests more share buybacks and future quarters to continue like the first quarter of 2015," said Litman by email.
Fuente: CNBC.com
Autor: Elizabeth MacBride
Fecha: 7 de Julio 2015
No comments:
Post a Comment