In a recent interview with Guru Focus ,value investor Rohit Chauhan pointed out very important points regarding approaching equity investing. One of the points which stood out for me was below [emphasis mine]
12. Before making an investment, what kind of research do you do and where do you go for the information? Do you talk to management?
I follow the usual process of reading up on the last 10 years of financial statements and annual reports. In addition to that, I also try to understand the economics of the industry and competitive landscape. Finally I try to work through my checklist to analyze the idea from as many view points as possible.
I do not depend on talking directly with the management as much and base my decision more on what the management has shared in the conference calls and how they executed the plans.
As investors we are susceptible to falling for compelling stories created by management & media therefore often are unable to do an unbiased assessment of a an investment situation. This can lead to less than optimum investing outcomes. It pays to watch what management is doing than what they are talking.
As social beings we overestimate our abilities regularly the company’s management is no different.
The rise of Bellamy international (ASX : BAL) is a story is made in dreams – A small family company facing financial challenges taken over by a group of private investors is turnaround by a passionate lady and industry tailwinds. The company blossoms into one of the of the most loved company on stock exchanges after a spectacular stock market debut.
Sometimes number tell a better story than words ,since its IPO in 2014 the revenue of the company has increased by 5X and EBIT by 17X, yes these are not typos !
The stock was a market darling with share price rising astronomically up 14X from its stock market debut in 2014.
In August 2016 the company announced full year 2016 numbers and growth juggernaut continued management said that they continue to see strong growth momentum both in Australia and China
However surprisingly just 10 days later the two most senior executives released an announcement on ASX stating that they have sold [action] 14% and 44% of their stake in the company to invest in personal assets
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Why would one want to invest in personal assets when your investment in company is almost doubling every year. This should have raised a red flag in investors mind however market ignored this as non-event.
May be management knew something that lay investors didn’t [ I am just speculating and not questioning ethical responsibility of management] , What I have found so far in my investing career is to stay with management teams which have skin in the game and always keep my eyes open to see what management is doing and not what they are saying
….and things were not rosy a business update was issues in December 2016, indicating that the growth juggernaut was slowing
but market anticipated something was cooking and the stock nosedived, unlike in India there are no one day circuit filters the stock crashed 50%, subsequent investigation by media pointed that Bellamy’s management might have knew about their losing market share however they didn’t update minority shareholders about it.
In this aftermath the m-cap of company reduced by 70% and trading had to be suspended as all funds were dumping and exiting this stock.
When it comes to investing actions definitely speak louder than words. So always keep an eye on what management is doing.
Disclosure – No position in Bellamy
All links from where information is sourced are hyperlinked, ASX announcements from company from ASX’s website, Image source – Google
Actions speak louder than words. Fully agree. Management’s overestimate in their companies is similar to parents’ overestimate in their children’s ability. Nothing wrong if used as a strategic motivational tool for employees, etc.. But as far as financial performance goes, it is better to be conservative and stick to the lower side of the forecast rather than on the higher wide. And of course, if top management team is leaving, sure, there is a danger sign/red flag.