Information is the key to successful investment

The G20 announcement this month of a fresh economic stimulus was a step towards the global cooperation needed to overcome the financial crisis. It was followed by a sharp rise in share prices internationally, with markets reacting not just to the G20's plans, but also to encouraging pieces of economic news, including better than expected US car sales and a rise in house prices in the UK.

The markets' sudden movement was a reminder of the importance of information to investors. Whether it is positive or negative, information is the key to successful decision-making, for long-term as well as short-term investment.

To say that information is important might sound like a truism, but it is too often forgotten during periods of economic well-being and rising share prices, when even an imperfectly researched investment decision can produce a healthy return.

In 2007, most shares in the UAE rose steadily. That changed dramatically in 2008, as the FTSE Nasdaq Dubai UAE 20 index (see chart) shows.

The index straddles the country's three stock exchanges, as it includes stocks on the Dubai Financial Market and the Abu Dhabi Securities Exchange as well as DP World on Nasdaq Dubai.

In 2009 there has been a slight recovery in the index. In March, Emaar's share price rose by seven per cent, while DP World was up by 26 per cent and Abu Dhabi Commercial Bank fell two per cent.

While it is difficult to predict how the price of a particular asset will move, the wise investor gathers as much information as possible before committing his money. In the case of shares, many people are tempted to buy because they hear a third-hand tip, or they succumb to the herd mentality and buy because everyone else is. This happens in Western markets as well as this region. Remember the dot-com bubble? It burst in 2000, ruining many people who had bought on low quality information.

A more rigorous approach should start with extensive reading. What are the newspapers saying about a company and the industry sector in which it operates, as well as the economy as a whole? Are they sounding alarm bells or are they positive? What is going on in the share blogs and forums?

In the UAE, widely read forums include UAE Tadawul Forum in Arabic and Dubai Share Talk in English. I am not suggesting anyone should believe everything they read in the newspapers, let alone forums (which can carry comments from people trying to manipulate a share price, as well as people who are simply ignorant). But they can be an important part of the investment conversation.

Another key information source is research analysis. This is mostly produced by investment banks and is written by specialists with a remit to be objective. Some research has to be paid for, but much is publicly available, at least after a time-lag. Some regional banks publish their research on their websites. Listed companies should also be able to point investors towards research that is written about them.

What a company says about itself is also crucial. If you are thinking of investing, you should read its financial statements. The level of transparency can vary greatly from one company to the next.

Benchmarks to assess transparency include: Does a company publish its financial and other statements on time and in a language that you can read? Does a company announce statements to the market as a whole, without telling a privileged few first? Does a company have an investor relations department? Does the investor relations department answer the phone?

Information supplied by companies in this region is improving. But there is room for progress.

Find out who a company's main shareholders are and who sits on its board. Having independent directors is often a sign that a company believes in good governance. For the wise investor, information as simple as this can make the difference between deciding to buy or looking elsewhere.

How share prices will move from now on is anyone's guess. But the guess of the well-informed investor will at least be an educated one.

- The writer's views are his own. You can contact him at singer@nasdaqdubai.com.