The stock market can be richly rewarding if you select the right stocks at the right time. Isn’t it? However, it is also a brutal place that has the potential to wipe off investors capital as well. In this article, we touch base on key lessons that past failures of companies have taught us. Be it Satyam, ADAG group stocks, Manpasand Beverages, Jet Airways, Kingfisher Airlines, or struggling companies like DHFL, Yes Bank and Jain Irrigation. We have also put links (highlighted words) to related articles of the lesson.
"Its fine to celebrate success but it is more important to heed the lessons of failure.” – Bill Gates
Firstly, there is no taking away from the fact that the core business of a company needs to constantly innovate and adapt to changing industry dynamics and consumer preferences to stay ahead of the market. This has become the new normal for companies but there are other aspects as well which one needs to look at. Here they are:
Debt remains the number one monitorable
Debt is like a double-edged sword for any company as on one hand during the growth stage it can help to fuel growth but during trying times it has the capability of even take down a company. Therefore, debt levels should be carefully analyzed and should be treated with caution obviously when it’s too high but also for companies that face high competitive intensity and low switching cost. For instance, many companies in the FMCG, Consumer Durables, and Auto (two-wheelers and PVs) has very little to negligible debt levels as the competitive intensity is high and consumers can switch to other brands easily. On the other hand, for power, switching would be tedious and could even prove costly, and competitive intensity is also low as there are pre-defined geographies.
Banks and NBFCs warrant extra caution
Banks and NBFCs are probably the most leveraged as they take money from people and in turn lend it to others. Now, as they ride a lot on borrowed money, asset quality, provisions and liquidity play an important role in the banks’ growth and sustainability. Therefore, these factors should be carefully monitored regularly to judge the bank’s stability. And what can make it worse are corporate governance issues in a bank/NBFC.
Well, a lot has been discussed about this, but time and again we are seeing companies having corporate governance issues. It is a qualitative aspect and therefore it becomes extremely difficult to ascertain corporate governance. Not only analysts but even credit rating agencies, institutional investors and auditors have let us down when it comes to predicting the firms failing on corporate governance. Be it the Satyam scam, or the collapse of DHFL, Manpassand Beverages or Yes bank.
Even big brand names can go bust
The stock market can be rewarding to even small companies having strong growth prospects. However, it can be brutal to even some of the big names. For instance, back in 2008, the brand name of “Ambani” was synonyms with growth but we all know how the ADAG group has come to a virtual halt. Even Jet Airways which was India’s largest private airline went bust. Globally, big prominent names like Kodak and Nokia also witnessed significant downfall wherein Kodak ultimately declared bankruptcy in 2012.
Do not follow the herd
This is possibly one of the oldest lessons in investing and yet many people often fall prey to this. Well if everybody around is investing in a particular stock, there is a tendency for potential investors to do the same. But most likely this strategy is likely to backfire in the long run.
Rumours and allegations
Many rumours/allegations do the rounds for several companies. This could be regarding miss-management by the company’s top officials, inflated profit numbers or fraudulent transaction. Rumours could on the positive side as well. For instance, let’s say an XYZ company is going to get a big contract from the government.
However, most rumours aren’t true, but even if the negative ones are, the company is most likely to deny it at first. It is impossible to know the truth due to limited information even though they are required to disclose, but what can be done is to keep yourself updated on the company’s latest developments (probably putting it on Google alerts) and/or reduce your concentration of holdings in the company if you are sufficiently sure. If the rumours are on the positive side for the company, it is better to not believe as most of them are not true.
Keep an eye on auditor reports
The auditor gives an opinion on the company’s financial statements that lend some reliability and validity. However, they also provide the basis of opinion which can be useful to understand how they arrived at the opinion. Or in certain cases, the auditor resigns as the statutory of the firm which is a big warning sign.
We hope that this would help you in making better investment decisions. If you like it, please do share it with others.