How to judge management quality before buying stocks
Moneylife SmartSavers Investor Club organised its fourth programme on 16th April with a session “How To Assess the Management Quality before Buying Stocks”. The session was conducted by Dr Vijay Malik (whom Prof Sanjay Bakshi calls ‘Dr Stock’ because he is a qualified physician who can check the health of stocks) shared his insights on how to figure out whether the management is pro-shareholder or not, by looking through the annual reports carefully. Dr Vijay Malik, a rigorous stock-picker and a popular blogger, who spoke in public for the first time, enlightened the audience with his quantitative methods that help decipher whether the management is trustworthy or not.
Judging the management quality is one of the most critical decisions while buying a stock. It assumes great significance for retail investors, as they have absolutely no influence on the company’s management. “While it is common to come across statements like shareholders are part-owners, this is not exactly true,” pointed out Dr Malik. “Retail investors cannot act like part-owners. They have no say in the management. They are compelled to accept whatever decisions are taken by the management.” This is why we must be absolutely certain that the company whose stock we have picked is run by a management that has the best interests of shareholders in mind. While everybody knows that management quality is paramount, investors frequently overlook this aspect because they do not have the right tools for such analysis. In his presentation, lasting for almost one hour 45 minutes, Dr Malik showed the audience how to search the Internet, read annual reports and scan the filings made by companies with the stock exchanges, to judge the management quality.
The session started with Debashis Basu, director of Moneylife Smart Savers, giving a quick overview on how management quality cannot be decided simply on the basis of adverse news and events that may only have a short-term impact. He gave real-life examples of managements with questionable decisions turning out better performance and so-called good managements ending up with mediocre performance. Dr Vijay Malik, with a unique combination—MBBS, MBA, stock-picker and biker—also explained with real-life case studies how profits/cash-flows of a company could be diverted to the promoters and related parties, defrauding minority shareholders. Pointing out that “Equity investing is a faith in management,” Dr Vijay Malik emphasised throughout the presentation that investors should “run at the first sign of trouble.”
The programme ended with a Q&A session between Dr Malik, Mr Basu and an audience of more than 150, moderated by Sucheta Dalal, director of Moneylife Smart Savers. Dr Malik patiently answered questions concerning pledging of shares, warrants, promoters’ holding and contingent liabilities. The video of the programme is available for Rs700. To get access, please write to [email protected]