Topic: How to Assess the Management Quality before Buying Stocks
I will address a session organized by Moneylife, in Mumbai on Saturday, April 16, 2016 in Mumbai. This session will focus on the assessment of management quality of a company before an investor makes the final investment decision about any stock.
Long term investors understand that a share of a company is not just a piece of paper but a part ownership in the underlying business of the company. Many established investors around the world have supported this view and have advised their shareholders, readers and other investors to consider themselves as part owners of the company.
Though, I agree with this view, I think that the part ownership concept suits more to those investors who have a significant stake in the company. These shareholders who have a significant stake have the power to influence the management in their critical decisions about the company and its business.
Retail individual investors very rarely have a shareholding in a company, which is large enough to influence management decisions. In such a situation, retail investors, have to accept the decisions of the management & other large strategic shareholders; whether such decisions are related to market expansion, diversification, capex or dividend declaration. A retail investor, most of the times has the option to either accept the management decisions or sell the shares and exit out of the company.
In such a fateful situation, the treatment being meted out to retail investor is almost out of her control and is completely in the hands of those in control of the business and management. The management stands as a mediator between the profits of the business and the retail shareholder. However good the business may be, however strong its competitive business advantage (moat) may be, if the management decides to corner the benefits to itself, then there is practically very little that a retail individual investor can do to make the management act in her interest.
Therefore, I believe that for a retail individual investor; a stock investment in addition to being a part ownership in company’s business, should also be seen as a partnership with the company’s management. If this partner who is the management, that controls all the decisions of the company, does not have retail investor’s interest in mind while it makes company decisions, then it is highly unlikely that the retail investor will get benefits of the business growth and subsequent profits made by the company.
Corporate history around the world is full of instances where shareholders of fundamentally strong businesses lost their wealth when the managements did not take good decisions. Such incidents involve cases where management led companies to bankruptcy due to poor business decisions. There also have been cases of frauds where managements/controlling shareholders siphoned off money from the company for their personal benefit and left the minority shareholders in the lurch.
In light of repeated instances of such cases, I believe that for a retail investor to benefit from her stock investments, she should invest in companies which are run by shareholder friendly managements who keep interests of minority shareholders’ in mind while they take key decisions about the company.
Therefore, it is evident that management assessment is one of the most important aspect of stock assessment. However, it is also one of the frequently overlooked aspect when investors conduct their own stock research.
As detailed in the article on Step by step approach to stock investing on the website, I advise readers & investors to assess stocks from multiple aspects: financial, business & industry, valuation, management, operating efficiency and margin of safety among others. However, based on my interaction with different readers & investors as well as the queries that I receive on the “Ask Your Queries” section of this website, I feel that many a times, investors focus more on the valuation and financial aspects of the stock research and ignore the management assessment.
Therefore, when Moneylife approached me with an invitation to address the session of Investor Club, I realized that it would be a very good platform to address stock investors and communicate my views about importance of management assessment for common investors before they part with their hard earned money.
In this session, I will talk about the various parameters and tools that an investor can use to form a view about the competence, shareholder friendliness and integrity of the management of a company.
Addendum (June 06, 2016):
The session was a success with more than 150 members from various parts of India attending it. I had written a series of articles covering the topic of my presentation. You may read these articles here:
- Why Management Assessment is the Most Critical Factor in Stock Investing? (Moneylife Session Part-1)
You may read about the audience feedback about the session here: Moneylife Session Feedback
It is often seen that retail investor does not have access to company’s management on one to one basis and therefore are not able to judge them while she invests in the company’s stocks. Therefore, the focus of this session would be to enable an investor to use the information available in public domain to everyone, to arrive at a decision about the company management.
The session is open to everyone who registers for it: Moneylife members, readers of drvijaymalik.com as well as general public.
Following are the details of the session:
- Date: Saturday, April 16, 2016
- Time: 3:00pm to 5:30pm
- Location: Walchand Hirachand Hall, 4th Floor, Indian Merchants Chamber Bldg, IMC Marg, Churchgate, Mumbai 400020
- Program Schedule:
- Introduction of Dr Malik by Sucheta Dalal.
- A very short presentation by Debashis Basu of the topic so that the audience understands the issues involved
- Presentation by Dr Malik on “How to Assess the Management Quality While Choosing Stocks”
- Q&A session between Dr Malik, Mr Basu and the audience, to be moderated by Sucheta Dalal
- Registration details: Click here or Click on the image below.
This event, is being organised by Moneylife. The Moneylife group consists of a fortnightly magazine “Moneylife”, which is focused on personal finance, a website (www.moneylife.in) focused on business & news and a non-profit registered trust, Moneylife Foundation, for promoting financial literacy along with consumer & investor initiatives in India.
Moneylife is founded by husband-wife duo: Mr. Debashis Basu and Ms. Sucheta Dalal.
Mr. Debashis Basu:
Mr. Basu is a chartered accountant by qualification and a journalized by profession. He has been a renowned figure in his profession and has worked for Business India, Business World, Financial Express, The Times of India and Business Today. He writes regular columns for Business Standard. He has written several books:
- Co-authored the best-selling book The Scam: From Harshad Mehta to Ketan Parekh with Sucheta Dalal
- Face Value: Creation and Destruction of Shareholder Value in India
- Growth Alchemy: Why Smaller Firms Fail to Find Finance and How Market-based Solutions Can Help
- Pathbreakers I & II
- Plain Truth Series on Stocks, Mutual Funds and Investments.
Mr. Basu has been a member of the Task Force of Securities and Exchange Board of India on the creation of IndoNext market segment for smaller companies and served as the member of the mutual fund advisory committee of SEBI.
Ms. Sucheta Dalal:
Ms. Dalal, a lawyer by qualification and a journalist by profession, has become a household name for investor activism in India. She started her career in 1984 with Fortune India and has subsequently worked with Business Standard, The Economic Times and The Times of India and Indian Express group. She worked as the Financial Editor at The Times of India.
Ms Sucheta Dalal has been recognized multiple times for her excellent work. She was conferred the Padma Shri award for journalism in 2006, which is among the highest civilian awards in India. She has also received the Chameli Devi Award from the Media Foundation and Femina’s Woman of Substance award for her work on the securities scam of 1992 (Harshad Mehta scam) and related writing.
She has written multiple books:
- Co-authored a book on the securities scam: The Scam: Who Won, Who lost, Who got away (1993). This book, was revised and re-released in 2001 and 2005. The book is currently called The Scam: From Harshad Mehta To Ketan Parekh.
- a biography of Mr. A.D.Shroff.
- Pathbreakers, which a compilation of interviews with eminent Indians.
Ms Dalal has been a Member of the Investor Protection and Education Fund of Government of India and a member of the Primary Market Advisory Committee of SEBI. She is also a trustee of the Consumer Education and Research Centre of Ahmedabad, a member of Bank of Baroda’s Standing Committee on consumer services as well as a member of the Consumer Complaints Council (CCC) of the Advertising Standards Council of India (ASCI).