I’ve come across countless arguments over the past few years over the relevance of quality management when it comes to picking stocks.
“Managements don’t matter!” was the powerful argument that I heard in the heydays of the pre-2008 era. And these people showed me stock market returns to prove how companies with shaky management teams could generate huge shareholder wealth.
Well, I had no words to counter them because even when I knew who was swimming naked (companies with bad managements), the fact remained that all of them were covered up by the rising tide of the stock market boom.
Cut the chase to 2012, and I’m ready with some good proof of what happens to companies who take minority investors for a ride, when the tide goes out.
These are the companies that…
- Chase growth at all costs
- Kill their balance sheets by taking on excessive debt
- Make random and overpriced acquisitions
- Secretively sell shares at discounted prices to group companies
- Pay their top people big money even when all other stakeholders are facing the music
- Have loud-mouthed, egomaniacal CEOs running the affairs
These are the companies that show utter disregard for minority investors. These are like what Rolling Stone’s Matt Taibbi once famously described Goldman Sachs as “great vampire squids” wrapped around the face of capitalism.
See the following chart. It shows the stock market performance of two of India’s biggest business groups since the stock market crisis hit home in January 2008. The chart shows why respecting minority investors matter so much for companies. It also shows what happens to companies that don’t respect the minority investors.
Data Source: Ace Equity, Safal Niveshak Research;
‘Reliance Group’ includes companies from both the Anil and Mukesh Ambani camps
As the chart shows, if you had invested Rs 100 in Reliance Group stocks in January 2008, you would’ve left with just Rs 18 as of now. As compared to this, your Rs 100 investment in the Tata Group stocks would’ve returned you a much respectable 1% over this 3 year period.
Do I need to say any more?
As Abraham Lincoln said, “You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.”
In the long term, the stock market is like a weighing machine, which correctly weighs the quality of a company’s management and how it treats minority investors.
The earlier companies realize this, the better it will be for them.
Similarly, the earlier you – as a minority investor – realize this, the better it will be for your investment returns.