Forbes Guide to the Markets

Before you get too comfortable with these distinctions, we must point out that sources and distributors frequently overlap. For example, stock exchanges transmit information about trades to many data vendors. They also distribute some of the same information directly in competition with those vendors. Sometimes, vendors add value by checking the data for errors and providing user-friendly formats for their customers. In the process, they may uncover inconsistencies in the data that the exchange does not know about, giving the distributor cleaner data than the source.

Just as the lines dividing data sources and distributors blur, so do the lines separating various means of accessing data. Sometimes, you can get the same information via a toll-free number or over the Internet. Many cell phones can send and receive electronic messages over the Internet. Increasingly, information is available on multiple delivery mechanisms, sometimes piggybacking on each other. Media such as the Internet and World Wide Web, email, cell phones, fax machines, DVDs, and print are increasingly becoming interoperable (and sometimes interchangeable) at the end user’s discretion.

Good Data Is Hard to Find

Not too long ago, a major newspaper published a correction in its financial section, stating that in some editions of the previous Saturday’s paper, the closing price of the Dow Jones Industrial Average, the yield on 30-year U.S. Treasury bonds, and the dollar/yen exchange rate were all stated incorrectly. The interesting thing was the size of the errors. The Dow was quoted incorrectly by some 2,000 points! The bond yield and the dollar/yen exchange rate were also far from their correct values.

These kinds of errors happen. Data entry errors, use of the wrong computer file (which might have last year’s data), and corruption of data by hardware failure, software failure, or by malicious persons with access to the records are all possible sources of problems. To guard against such problems, it’s a good idea to use and compare multiple sources of data whenever possible. Always investigate discrepancies in your data. A helpful practice is to establish ranges of acceptable values for prices and to automatically investigate any price (or other data value) that falls outside of this range. For example, if yesterday IJK Corporation was trading at $100 per share, and today’s close is $11 per share, find out what’s going on! Did the stock really lose 89 percent of its value? Or did someone leave out a zero somewhere? (The price may really be $101, or perhaps $110 per share.) It could also be that the stock just did a 10-for-1 split and is up 10 percent. It’s not unusual for a busy investor to miss an announcement of a stock split, discovering it in a moment of panic when it appears the stock has plummeted. If you get your data in a newspaper, there should be a code telling you that the stock has recently split. But if your data is delivered electronically, it may not be so obvious what has happened.

A cardinal principle of investment analysis is borrowed from the computer programming department: garbage in, garbage out (GIGO). This means that a good investment decision is highly dependent on good data. We have seen how bad data can be very misleading. Sometimes, even accurate data can mislead if it is presented out of context or graphed in a way that fools the eye. For instance, when comparing graphs of stock prices, it is good practice to make sure that the prices are shown according to a consistent scale and over a meaningful time period. Standard mistakes (and/or deliberate misrepresentations) include comparing prices for different time periods with different bases and scaling factors (see Figures 7-1a, b, and c), or even in different currencies.

Figure 7-1. How graphs can mislead. The relationship between the prices of two stocks looks very different in these three graphs, even though the data is identical. The first graph uses the same scale and starting point for each stock, thus providing a meaningful comparison (graph a). The second and third graphs distort the relationship between the prices of these stocks by shifting the starting value (graph b) or scaling factor (graph c) for stock B (shown on right vertical axis). Although graph a clearly shows that the price of these two stocks is equal in May, you would never know it from looking at graphs b or c.

A Selection of Information Sources on the Financial Markets

Financial Information Supermarkets

Investor Associations

Corporate Issuers

Financial Markets

Market Data Vendors

Mutual Fund Rating Services

Software/Computer Vendors

Banks, Brokers, and Mutual Funds

Government Agencies

Trade Groups

Magazine and Newspaper Publishers

Central Banks

Newsletters and Other Sources