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| Pic by Stuart Miles /freedigitalphotos.net |
While making any investment, the common pitfall that investors fall in is just to focus on the size of returns they get without checking how much of risk they are bearing to get that return. If the probability of losing is higher, then the expected outcome would be lower even if the absolute return looks higher. To put it in simple terms, you are more likely to invest in a bank Fixed Deposit offering 8% return if you are confident about the bank than giving it to an individual who offers you say 24% return on the same amount. Reason for that is that the risk that individual does not pay you is higher than the risk that they bank would not pay back. The biggest risk in this case is not return on principle but return of principle. When we invest in a company FD or in a company stock or its other debt products like debentures etc. it is important that we check the leverage level of that company and also its credit rating before choosing to invest. In addition to checking the company it is also important to check if the promoters/managers have ever had any other governance issues before.
With the power of Internet, it has now become a manageable exercise and given below are some of the ways to check the company and management quality.
- Check the watchoutinvestors.com site. This is a free website sponsored by NSE and BSE which is a great place to search for any relevant issues in connection with the Company or Promoter. As per the site, they cover individuals/companies who
- Have been indicted for economic default and/or
- Have been non compliant of laws/guidelines and/or
- Are no longer in specified activity
- www.consumercourt.in is a good source to check on all the court issues with that company or individual. If they defaulted on deposits before and some one reported it would be there.
- Also you can check some of the consumer complaint forums like http://consumercomplaints.in/ and others to check if the company has any relevant complaints reported by customers.
If you find that there are records in any of these sites that suggests that the company or the management quality if questionable, avoid investing in equity or debt related instruments with that company. This would save you a lot of money and emotional trauma. In Charlie Munger's words 'All I want to know is where I would die, so I don't go there'.
