And The Weather Shall Be

A self-proclaimed global market leader with a dominant market share in their specialty chemicals business. The founder is still with the business and is one of the largest shareholders. The business has been experiencing significant growth over the past 36 months helped by a long tailwind of industry policy.

Participants in the capital market were swooned by the management’s charisma, capability, and aligned interests evident in their large shareholding and the fact that the company remains owner-operated. Target prices were issued and coverage were initiated and hotly disseminated.

When a dear friend highlighted this company to us, our immediate thoughts were “avoid at all costs”. The subsequent thought process on “how to break this news?” to the dear friend was a harder task.

Indeed, why avoid this company when everything sounds so wonderful – global market leader, dominant market share, deep intangible know-how required for their specialty chemicals business, long tailwind, aligned owner-operator management with large shareholdings, and even a low valuation to boot, what else can an investor want?

Interestingly, what the market saw as “aligned management” due to their “owner-operator’s large shareholdings”, we saw as potential unaligned management with a highly dubious track record, specifically in scenarios where “large shareholdings” were required and “power” and “opaque schemes” were necessary to push through certain actions. In short, we saw a potential corporate mis-governance situation where no real checks were in place to safeguard investors, mom-and-pop and institutional ones alike.

We asked ourselves: “what if this weatherman can control the weather and make it breezy or stormy as he please?”

We subsequently shared some brief research about the management with a class of investors and they responded with “Let’s not waste time on this company, we should just throw it into the wastepaper basket.” After the investors’ response, within a month’s time, this company made a public announcement that some earlier expectations regarding their growth has been significantly curtailed and capital market participants started issuing lower “target prices”.

The lesson here is that “owner-operator” and “large shareholding” does not necessarily mean management is aligned with us. Conversely, “professional management” and “small stake in shareholding” does not necessarily mean management is not aligned with us.

Investors have to understand that “ownership” is a way of Life, not a simplistic shareholding number.

The crux is “what are the intentions of the management?” and “what is their track record?”

Over the years, we’ve found that it is more important to understand who you are investing with rather than what you are investing in, and that investors should prioritise return of their investment over return on investment.

Now, theoretically there are no upper limits on a stock’s price – in fact it can jolly well go up a lot in price for all we know. And we are not saying this company will go to zero, but taking the management’s track record as a guideline, we will not be surprised if it did. We just want to make sure we steer clear of such incidents and focus on the high quality companies that truly matters.

In any case, if you find yourself fretting whether you have this company in your portfolio, my humble suggestion is “why don’t we keep our focus on high-quality long-term winners? 🙂

Months later, market participants seem to catch on to the insiders' track record.

Question) What is the worth of a company with dubious track record where investors repeatedly lost money investing in the insiders' several listed pet projects? How do you reliably value such a company?