Investing smartly in the time of scandals
Dec. 8: Wednesday was an otherwise uneventful day on the markets, except for a handful of stocks. Companies such as Ruchi Soya, KS Oils and Karuturi Global saw shares prices drop by 10-28 per cent as television channels reported that they were being investigated for rigging stock prices.
The past few weeks have seen this story being replayed again and again —and investors have lost a fortune on scandal tainted companies. So what are the safeguards that a retail investor could observe — to avoid such lemons? This publication spoke to fund managers and market observers to figure out the red flags that should serve as a warning.
“Quality of management is the biggest factor to consider before investing in a firm,” says Mr Nandkumar Surti, chief investment officer, JP Morgan Asset Management. While retail investors may not get to interact with a firm’s management directly, there is enough material available publicly to show up who is good and who isn’t, he says.
Another aspect to consider is the firm’s business model, says Mr Aneesh Srivastava, chief investment officer, IDBI Fortis. “If it is in a profitable, growing business, the need to resort to underhanded tactics isn’t there,” says Mr Srivastava.
Separation between the management and ownership is a good sign too, he says. Companies such as L&T, ITC, HDFC, ICICI Bank, Tata Group and some multinational firms are some of the names that figure in this category, he adds. In case of public sector enterprises too, the management is distinct from the shareholder. However, PSUs typically are less aggressive compared to private firms.
The shareholding pattern can also yield interesting information. “If there are some large institutional shareholders, that’s usually a good sign,” says Mr Surti.
Good institutional inves-tors do some due diligence on firms before investing. Apart from the comfort factors, there are also some warning signs, he adds. “If the valuations are at absurd levels or there is suddenly a lot of news floating about the firm, that could be a warning sign,” he says.
Also, most companies at one point or the other, need to get their debt rated by rating agencies such as Crisil, ICRA or CARE. These ratings and the reasons behind those can be helpful too. “Credit ratings also look at factors like corporate governance, accou-nting quality, management issues etc,” says Mr D.R. Dogra, managing director CARE ratings. Many of the 2,000 odd companies rated by CARE are below investment grade.
Do remember that these are not rules cast in stone. You can follow them and still end up losing. However, following these can reduce the chance of a misadventure with your hard-earned money. If you feel that you can’t put the effort required, it is better to follow professional advice.
Post new comment