Succeeding in our professional and personal lives requires tremendous confidence.
Our natural desire to be highly confident, however, leaves us at risk of becoming overconfident, which may be the biggest error of judgment that we make.
It is when false confidence drives overconfidence that we become susceptible to hubris.
Such hubris is commonly seen across people in power – like corporate CEOs or Chairmen.
In fact, according to researchers, the most reliable indicator of financial fraud is not good corporate governance practices, but rather, the ego of the chief executive.
A CEO’s hubris fuelled by overconfidence and arrogance is what ignites and accelerates the propensity of his senior managers to commit, or be oblivious to, value destroying behaviour.
You’ve heard the story of ‘King of Good Times’…
Take the case of Kingfisher Airlines (KFA), where chief Dr. Vijay Mallya is busy firing salvos at everyone (except himself) for the destruction that has happened at his airline company.
If you’ve heard Mallya’s sound-bites over the past few days, you must’ve sensed his ego (and a lot of it) playing out through his words. Like, when he said…
- Closing down is not an option. It will not happen!
- Why should we give up as long as we get help? Help is not bailout. (This was really funny!)
- The entire problem surrounding the issue of bailout is of the “media’s making”.
- We were the biggest and the best. We may not be the biggest now but we remain simply the best for our guests.
Amazing, isn’t it?
A man, whose ego first drove him into a business that is notorious for destroying wealth worldwide, and then led the business to actually destroy wealth (see chart below) by pursuing over-the-board growth targets, still dares to come on media and say why he believes he’s right and the world’s wrong!
Data Source: Ace Equity
After huge losses, mounting dues to banks, thousands of harassed customers, and huge destruction in shareholder wealth, KFA is still attempting to keep its head above water in what appears to be a losing battle…
…all because Mr. Mallya is seeing some ‘light at the end of the tunnel’!
But where’s the light for minority investors?
Who cares about minority investors when it comes to financial frauds (I couldn’t find a better word) like the one at KFA?
Not CEOs! A majority of them anyways work to fulfill their ‘personal dreams’ and satisfy their ‘bloated egos’.
What about the regulator? You’ve got to be joking. After all, if you want to risk your money on the equity markets, it’s your problem.
Whether it’s a ‘vanishing’ company or one that is looking to survive on bailout money (sorry, not bailout…‘help’ is the right word!), it does not make too much of a difference.
It’s really ‘your’ problem – the problem of the investor who’s made the choice of buying and holding the stock.
You have no one else but yourself to blame if you are stuck with stocks like KFA, or for that matter a Suzlon or SKS Microfinance that we’d covered earlier.
“But how do I identify a financial fraud?”
Well, one way is to pull out the company’s last 5 years’ annual report. The debt/equity ratio (from the balance sheet) and the operating cash flow (from the cash flow statement) will give you a lot of hints if the company is ‘playing around’ with shareholders’ money.
An easier way is to look at how the CEO talks when he’s in the media.
If he’s charged up talking about the future, or if his eyes light up while announcing his next acquisition, or if he explains why a move into an unrelated business will be great, you know something is wrong (or could go wrong).
I used one such trick while analyzing IPOs during the 2005-2008 era.
A company that held its IPO meet at the most luxurious of hotels and also funded a post-meet lavish dinner (with drinks) for analysts and fund managers, was a sure-shot ‘Avoid’.
Then there were some that offered analysts gifts like perfume bottles, expensive pens, and coffee mugs even as their CEOs talked how they would have to take on more debt on their books to fund their aggressive growth targets!
The subtle hints from such companies was – “We’re treating you with such nice food and a gift so that you overlook what’s wrong with our company and write a positive report.”
It all added up to create a very authentic view of whether there was something fishy that was happening in the corner office (of the CEO).
And more often than not, my ‘Avoid’ or ‘Sell’ views on such companies worked. 🙂
You can try this for yourself as well…with the stocks you already own.
Do Google search for interviews of CEOs of your companies, and read what they have been saying over the past few years. Also take out their annual reports and read the Chairman report. Have a look at the balance sheet and cash flows as well.
If you will do just this, you will be doing a great justice to your hard earned money which you might’ve invested in some companies that might go the KFA route.
But whether you test your companies this way or not, always remember that when a company that you hold goes bust and so does your investment in it, the entire blame lies on you…not the CEO or anyone else.
It was, after all, YOUR choice!
R K Chandrashekar says
King of Good Times or shall we say bad times for the poor investor in KFA! Having said that, this is a sector you shouldn’t touch with a barge pole. Most Airline Companies worldwide are loss making. Mallya can drown his sorrow over bottle of his cash rich alcohol!, but what about the people who have invested in KFA??
Vishal Khandelwal says
Yes you are right, Mr. Chandrashekhar. In fact, I’d done an article on the poor economics of the airline industry (See here – https://www.safalniveshak.com/3-stocks-i-will-not-touch-with-a-10-foot-pole/), and why investors must stay away from such businesses.
Very true Vishal, it’s not to blame the CEO or anyone when we have invested without proper research or worse, knowingly. Most people were of the thought, like one of my colleagues, who made the comment when the market was in the dump, you invest in ANY stock at this stage and you will easily make 50% in few months. It’s people’s money and their choice.
Nice article Vishal, the father and son duo who keeps on flaunting weatlh as if there is no tommorow, in a country where majority of people could not afford their daily meals-they deserve this.
Last Sunday The Hindu Business Line Carries an article on page No. 8 tiltled “prospecting Investment”-by Gopal Krishnan(forgive me if i have misspelt the name) it reads the same as one of your blog.
He is following u or u r following him?….LOL
Vishal Khandelwal says
Thanks for your feedback, RichFellow!
Which Business Line article are you talking about? Are you talking about this one from Mr. Gopalakrishnan of Infosys? https://bit.ly/wQjuyI
If yes, well I didn’t read it earlier. But then, when two people have similar views on a subject like ‘ethics in business’, the thoughts that come straight off the heart also sound similar. 🙂
what worries me in KFA crisis is
(a). demanding bailout by government citing infrastructure essential for economy….
(b). banks further lending throwing all norms of prudent bank lending norms and practices…
(c). veil of secrecy still surrounding in ..keeping the investors guessing..
I really fail to understand the demand for its bailout …why the government bailout a company which flaundered its capital and reserves by its wrong policies…
is satyam bailout became a wrong precedent for all this senseless acts of companies…?
on banks’ further lending….why no one raises accountability..? this is not small sum …even major investors of banking companies are silent…
unless and until, active investor interest protection monitoring comes to place, we may have to bear with this kind of losses, i suppose.
Vishal Khandelwal says
Hi Sri, I completely agree with your part on KFA. And of course yes, there has to be a proper mechanism of investor protection. But I believe that given the history of ‘investor protection’ worldwide, the investor is better off protecting himself by buying sound and ethically managed businesses. He cannot (and must not) rely on the regulator or the government to protect him from such eventualities.
Its business line not business standard Vishal…the example of doctors 200 out of 600 etc.
Vishal Khandelwal says
You’re talking about this article on Safal Niveshak – https://www.safalniveshak.com/profit-from-stock-market-losses/
Well, this question was from a study conducted by Nobel Prize-winning psychologist Daniel Kahneman, which I also cited in my post. And it’s a very famous case study in human behaviour, so you might read about it at several places.
The more and more i read about investing, the more and more difficult its becoming to make decision on my investments.
Vishal Khandelwal says
Oops Vikrant! I thought I was trying to make investing simpler for you! :- )
Exactly Vishal, if u get time plz do read that article its by “Adarsh gopala krishnan”, it’s funny that how a single case study can be used for different purposes…LOL