Arthur Levitt, the chairman of the
Securities and Exchange Commission
, issued a wake-up call to investors on Monday, warning them about the dangers of investing in companies with no discernible track record, buying stocks on margin and taking advice from analysts who may have hidden agendas.
In a speech at the
Boston College Finance Conference
, Levitt said many companies were rushing to go public because investors' appetite for new issues is strong. However, he said, many companies are going public prematurely and do not have the sound fundamentals to sustain them at a later stage. As a result, Levitt admonished investors to do their homework before putting their money into an upstart company.
Levitt also warned investors about the sources of information available to them, since many of the people recommending stocks may have a vested interest in seeing them perform well.
"Unfortunately, these days it's not always just separating good information from the bad -- often it's a question of gauging objectivity or bias," he said. "In many respects, a culture of gamesmanship has taken root in the financial community making it difficult to tell salesmanship from honest advice."
Levitt noted that analysts often work for firms that have lucrative underwriting relationships with the companies they cover, making it difficult for them to be objective.
"One can only imagine how unpopular an analyst would be who downgrades his firm's best client," Levitt said.
He also cautioned investors not to overextend themselves. Noting that "the level of margin debt has surged even faster than the stock market," Levitt said investors need to understand the risks of borrowing money for investment purposes.
In some cases, he said, investors buy on margin not understanding that the brokers have particular rights when they grant such loans. For instance, a brokerage firm can sell securities bought on margin without notifying the investor, even if that results in a substantial loss to the investor.