Wolf Money(portfolio update for end Aug 2023) part 1
In the popular Netflix romcom drama, Emily in Paris, Lily Collins portrayed Emily Cooper, an American marketing executive sent by her US company to their subsidiary in Paris to give an American perspective to marketing. Without knowing a word of French or local culture, she embarked on a difficult journey of communicating with her colleagues and clients, in which it resulted in miscommunication and her being the butt of the joke. Emily assumed everyone in Paris could or wanted to communicate in English. She was forced to learn the language in class so as to communicate well with her colleagues and clients. It is important to understand the language of choice in the area one operates so as to be able to communicate effectively in work and relationships.
Listed companies by their status, have to communicate extensively to shareholders due to its regulatory obligations as a listco. Putting out financial announcements and communique to the general public as required by the stock exchange is an important aspect of being a listed company. Through my 23 years of experience in the stock market as an ex-broker/investor and a certified investor relations communicator. I managed to acquire a certain science in understanding the language of listed companies. Although I can’t proclaim to know every single bits of it, I try my best to understand the subject company of my interest to my best ability. Some smooth operators have managed to pull wool over me but I had equal success in picking out the financial shenanigans during the course of my work. If one hope to do better in investment, picking up important pointers on communication by listed companies either verbally, visually or in written are critical. There are no matrixes, statistics or financial numbers to back up my theory but I hope you enjoy this. Enchanté, welcome to the unspoken language of listed companies.
1.) No listed companies, good or bad, will tell you the true picture of their business. The good one will manage expectations by saying “cautiously optimistic”. The really bad one will tell you, a turnaround of the business is coming, no issue if they have one bad year until you discover they had been telling investors five annual general meetings before. The only thing they are capable of turning around is their pay cheque. A lot of hot air and no substance.
2.) Some communications were done through the actions of the management. I find management compensation and dividends an important unspoken compact between the shareholders and management. I view an uninterrupted dividend history as a promise to shareholders in return for the management’s right to continue as stalwart of the company. Management compensation must be kept at a reasonable amount. The last kind of listed company you want to invest in, is a company that pays themselves outsize compensation, leaving crumbs or nothing for minority shareholders. I call them the “ATM” company a.k.a “After The(your) Money” company. They literally treat the listed company as their own private ATM. Companies that constantly making cash calls can be categorised as the same type of “ATM” company. I am surprised they had not gone into running a “financial institution”, they could be the “best bank”in town with all those money printing. I avoided them totally.
3.) Some communication can be in form of body and visual language. I remember one particular experience with a listed company when I was invited to attend their result presentation. The CEO was ill prepared for questions, constantly seeking advices from CFO and management. One could sense through his body language how uncomfortable he was with answering questions from the analysts. One of the main role of a CEO is to sell the merits of the company to investors and analysts. A company with a CEO that doesn’t know the inside out of the business is a scary prospect for your capital, a blind leading the blind. I see attending agm as a golden opportunity for investors to size up the management. One shouldn’t miss the yearly opportunity to make your CEO and management work hard for their salary by asking them tough questions. I have known director that hates the dreadful QnA during agm. I came across an agm that turned into a shouting match with director and shareholder trading profanities. For the neutral, it was far more interesting than any Netflix drama. Unfortunately the drama had been paid for many times over by the falling stock price. Avoiding communication faux pas is essential for any company.
4.) Some listed companies farmed out their IR function to an external investors’ relationship firm(IR). Some companies find it more cost efficient to be using the service of IR firm than to maintain a department in charge of investor relations. The primary goal of any IR firm is to communicate effectively and to give the listco a positive spin, putting the company in a positive light among investors. Nothing wrong with what the IR is doing, they are paid for what they are required. I had known consultants who did a wonderful job for their clients. In 9 out of 10 times, if the company suffered a big drop in profitability. The headline usually started with “Record revenue for the first 1H” or “Record order book achieved in 1H” something of that kind. The bad profit number is likely hidden in the last few pages of the media release. A bad result is likely to slip into SGX announcements page at the end of the 60 days mandatory reporting period and most of the time on Friday as late as 11.30pm when everyone was soundly asleep, hoping the investors would missed the announcement over the weekend. The “weekend escaper” giving a new meaning to T.G.I.F, Thank God It’s Friday! A good company is always consistent with their communication in good years and in bad years. If the company is reporting result on a Friday after market closed, be prepared for disappointment. It pays to read the media release in full.
5.) An expensive acquisition is always a concern for me. Management that talks very favourably about the acquisition in terms of synergies and cost savings should be taken with a pinch of salt. Most major acquisitions failed to achieve their desired outcome. Remember CEOs are paid not for sitting on huge cash pile in the company but for the ability of the company to generate profit. Most CEOs in US do not last more than 5 years. The average tenure of CEO in a S&P 500 company is around 4.9 years. Remember they were paid to make quick decisions which could boost the company’s profit in the shortest possible time, sometimes at the detriment of long term shareholders’ interest.
6.) Mastering the accounting language is a skill everyone must have to do well in investment. Understanding accounting language is crucial and essential. I avoid companies with bad operating cash flow. Some companies might be able to cover their track of poor cash flow by increasing borrowing for a few years as a stop gap measure but loans had to be paid in the future. Cash flow, like blood that keeps a human alive which it does for a business, is a lifeline for all businesses. It is more difficult to fake operating cash flow. Without positive operating cash flow over a long period, the business will fail without an additional cash injection from shareholders. It is a catch 22 situation for shareholders to be in, either the company die of natural death or the shareholders were slapped with endless cash calls. I had encountered company that changed their accounting policy 3/4 into their reporting year just to smooth out the earning. Needless to say, the share price suffered. I was taught a hard lesson. Knowing basic accounting does open a small little window into the health of the company. Accounting is a big subject. There were interesting case studies which I can’t put on record. Even after 23 years in the stock market, the market never failed to amuse me by the financial innovation deployed by some listed companies. Some case studies were outright brazen and bizarre.
7.) Selling the merits of the company to investors is a fine art to master for every CEO, over doing it on every given occasion gives an impression of desperation. Some REITs with a chequered history going on multiple platforms to sell “koyok”(medicated plaster) with old management still in place. At the other extreme end, I came across companies that literally turned radio silence on investor relations, no IR department, no analysts’ coverage, not keen on replying email or even going on roadshow. For this type of company, I leave them alone, the boss is content with a low valuation, happy to eat his own vomit. Why get listed in the first place I wonder? Paying $1m a year in costs to stay quiet? Baffling! Balanced communication is important.
I will stop here for now, if I go on further, you will be reading a book on the topic. God bless our investors.
To be continued……..
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