Company and Promoter Quality Check

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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'.

Warning Signs To Look For In Annual Reports

freedigitalphotos.net/David Castillo Dominici

Warning Signs serve a very important role in our lives.  They caution is in advance about the imminent dangers if we do not follow the guidelines or rules. We come across warning signs everywhere and they provide the information through signs so you immediately recognize them and take appropriate precautions.  So, what does this have to do anything with investing?  Just like any other activity investing is also filled with lot of dangers for the reckless investor.
Corporate governance is still a big concern in India and it is found to be lacking in both small as well as large companies.

Investment Checklist - Part2

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In my previous post on Checklists here, I provided an overview on the checklists and the benefits of using them.  In this part, I have listed the checklists I follow while analyzing a security for potential investment.  As I mentioned, every investor may have a long or small checklist based on their need and its more of an individual preference.  Indian companies are notorious for corporate governance and one needs to be very diligent in their evaluation exercise.  As I mentioned before, it is the safety of the investment and its downside  that is more important than the upside.  Our idea is to reduce the errors of commission than committing errors of omission.

Investment Checklist - Part 1

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Checklists are basically tasks/checks that are jotted down in orderly way to make sure that all the items mentioned have been done or covered.  Checklists are used for managing very complex systems or procedures where things are not left to the memory of the person that is executing the task or following the procedure.  Checklists are very commonly used by pilots while flying aircraft and now checklists are slowly being used by health care industry as well during surgical procedures as well as in ICUs.  Checklists have not only helped in saving many human lives but also has helped in cutting down cost and improving quality.  

Open Ended Questions to Management

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While reading the Investment Checklist written by Michael Shearn,  I came across an interesting list of open ended questions that can be asked to the management of a business. He recommends asking open ended questions to the management than asking close ended ones as open ended ones tend to give more insight about how the manager takes decisions.  Also he recommends that hypothetical questions should be avoided as they do not guarantee how the manager will actually act when such situation come.  

Key Metrics on 25 Industries by Forbes

This is a very useful slide presentation provided by Forbes on metrics on 25 industries.  While this may not list all the metrics, they could be useful to analyze where the company you analyze stands with respect to the industry.

http://www.forbes.com/2010/06/29/best-in-class-financial-metrics-entrepreneurs-finance-sageworks_slide.html