August 11, 2006

Mark Cuban has started a new web-site called ShareSleuth. It works like this: he shorts a company that he figures is a bad investment; he says so on his site, and explains why he thinks so. Predictably, Mr. Cuban has been accused of being unethical. BusinessWeek says Cuban “may be out of bounds”; a Barron’s reporter questions if the site is ethical; various bloggers have said that they’re uneasy about Cuban mixing journalism and trading.

Cuban has responded well , justifying what he’s doing and also pointing out the hypocrisy of mainstream journalists in pooh-poohing the idea of making money from news.

Today, when someone praises a stock (say on CNBC) the journalists will go through a standard declaration of interest. Does the person own the stock? Does he have a relationship with the company? What does this gain us: if the person praising a stock owns the stock, should the viewer discount the advice, or should the viewer discount the advice of the person who talks the talk but has not walked the walk?

I’m always suspicious of people who praise a stock but will not put their money where their mouth is. For stock tips, I look to quarterly reports of various mutual fund managers I respect (and to sites like GuruFocus) I will only listen to people who are serious enough to buy the stock. Could someone be trying to “talk up” a stock that they bought? Yes, it could be… but I’m a responsible adult. Anyone who is investing for themselves — rather than via a mutual fund — ought to assume the responsibility of the decisions they make. If they go by what someone else says, without giving any consideration to that person’s motives, then they deserve any downside they reap.

The same is true of shorting. I’m not interested that someone does not like a stock unless they have just sold some — either earlier holdings or by going short. Could they be trying to “talk down” the stock? Could be, and the same comment as above applies here. Further, if a stock can be talked down, surely the good owners of the great company in question should happily view it as buying opportunity.

Since Cuban has declared his interest, he passes the honesty test. I recommend that he should add the following caution to his site: “Readers are cautioned to assume that I am trying talk-down the price of stocks I have already shorted. If you do not know me, don’t trust me.

I cheer Mark Cuban and hope to see many sites like ShareSleuth.

I wouldn’t be surprised if Cox’s SEC pokes its nose into this and tries to restrict him. There’s also the risk of civil suits by the crooks who find their game is up. With our legal system, he might also end up being sued by someone who shorts a stock that is critiqued on the site and loses money doing so. Hence, my suggestion that he should include even stronger cautionary language.