The most exciting phrase in science isn’t “Eureka” but “That’s funny” – Isaac Asimov
For most of 2019, Indian stock market has been in poetic justice mode. A glance at the list of stocks whose prices hit a yearly low level is revealing. The common denominator running across these unpopular souls is revelation of (a life of) crime. This isn’t merely limited to seasonal (e.g. NBFCs) or perennial offenders (e.g. real estate). Across a wide range of unrelated industries – travel, education, apparel, media, beverages, building materials, retail, agriculture, engineering, tech – outed companies have seen their share prices collapse. Declines have been far too sudden and sharp for investors to bail out. By the time a crowd yelled “THIEF”, pockets had already been picked.
How can investors recognize such crooks early enough to avoid damage, especially in cases where they came across as model citizens? Most of the above cases are in ‘clean’ industries, with seemingly healthy financial metrics. They are run by leaders who are well-spoken and well-tailored. They had character certificates from high society and topped popularity charts for years.
To paraphrase Asimov, “The most useful phrase in investing isn’t “THIEF” but “Hmmm, that’s odd”. While studying a company in detail, the key is to watch out for anomalies. These are things that don’t seem to fit, don’t quite make sense and feel too good to be true. They trigger the thought, “if you are actually a model citizen, this shouldn’t be here”. Over the years, applying this approach threw up seemingly basic questions that proved to be life-savers. Here’s a sampling (names redacted, though not hard to guess):
· Highest yield, lowest loan loss? Badiya hai!
· What! Hypergrowth in boring industry?
· So, you collect cash after waiting a year?
· Why tout a science (fiction) project so much?
· Decent people don’t punt on land, no?
· When were you awarded that coal mine, again?
· Why would Walmart allow you alone to make so much money?
· Wait, how many acquisitions last month?
· Slow down, you’re not supposed to share insider info until our 2nd date!
· If you’re so good, how come you need so much money from others?
· A brand with zero advertising?
· Corporate jets? In plural?
· Consumer company bidding on a giant government tender, hmmm?
· You can import duty-free when no one else can?
· You’re debt free, but pay 200 crore in interest cost?
· Domestic business with SEZ benefits? What an idea Sirjee!
As you can see, some questions obviate the need to actually answer them! Anomalies simply revealed that something bad was afoot. At the least, the company wasn’t quite the model citizen that it was made out to be. It had no bearing on when, or even whether, latent malfeasance would surface. In many cases, companies stayed fashionable for years, despite anomalies becoming worse. The wait for justice was as frustrating as the suddenness of eventual justice. When the movie finally ended, people seemed genuinely shocked at what came out. Hmmm, that’s odd!
[I originally published this in Dec-2019 at https://www.linkedin.com/pulse/spotting-crooks-anand-sridharan/]