Joys Of Compounding: The Passionate Pursuit of Lifelong Learning

by Gautam Baid

6. Management Analysis Study the background and credentials of promoters and search the Internet for any corporate governance issues. Use keywords like “fraud,” “scam,” “litigation,” “investigation,” and the like. Management red flags include exorbitant salaries, perks, and commissions (most worrisome if paid during a period of losses); a high percentage of insider holdings being pledged; promoters merging their weaker privately owned companies into their publicly listed company; engaging in significant relatedparty transactions; appointing relatives who lack adequate qualifications; using aggressive accounting practices; frequently changing auditors; changing the company name to include buzzwords from the hot sectors currently in high demand; and engaging in overly promotional activities, such as quoting broker reports for its revenue or profit guidance and issuing frequent but meaningless press releases and announcements. A hard sell usually indicates that some form of financing is impending. (Show me a promoter who is obsessed with the company’s stock price, and I’ll show you a business that guzzles cash and constantly needs to raise money.) Always read the “Liquidity and Capital Resources” section in annual and quarterly Securities and Exchange Commission filings to assess the capital-raising needs of the business you are researching.