It is very important to judge management quality before investing in any stock. We all know that good management can turn around a poor business, while poor management can ruin a good business. Now the big question is, how do you judge whether the management is good or bad? Frankly, not a single bestselling book solves this query. Many of those books coined the idea of management visit, discussion with founders, factory/plant visit, etc. Do you think it is possible for any retail investor or speak to management or visit the factory or office?
Suppose you have twenty different stocks in your portfolio. Those twenty companies are headquartered in eight different cities. Before investing, is it possible for you to visit all of those cites to meet the management? I am for millions of small investors, it is next to impossible to meet the management before investing in a company. I have serious doubt about the analyst’s meetings with management as well. Suppose you are holding the position of CEO for a company and the senior research analyst of a reputed brokerage house. During our meeting, will target will be to please me so that I can compose a good research report and thus boosting the stock price. After all, being a CEO you will be benefitted the most from the rising stock price. So, it is obvious that management will always try to showcase a rosy picture in front of equity research analyst, this is the simple reason behind my doubt on management visit. There are several example of how, despite multiple company visits, many reputed firms lost big money just by believing the words of management. One of the most prominent example is how famous brokerage firm, Motlal Oswal lost heavily from their few hundreds of cores investment in Manpasan Beverage despite multiple management interaction. On the other hand, attending the Annual General Meeting is far more fruitful because you are not alone at AGM. There are a sizeable number of directly investors and the entire management team to answer quires. Further, attending a conference call is also better than a company visit. After the result announcement, many companies conduct conference call where various analyst can interact with the management. Different questions from analyst community and answers from management provide a clear picture. At the same time, I understand that attending every AGM is not possible for every investor. Millions of small investors reside in small towns which was far from metropolitan cites. Moreover, maximum investors typically have day jobs.
I am going to present the simplest way of obtaining information about the management’s credibility. From the comfort of your home, you can evaluate these simple and easy to understand about the methods. I have tested these methods over an extensive period so that you can benefit immensely from my experience. Only there inputs are required for our purpose.
- Share holding Pattern.
- Dividend History and Tax Rate
- Return on Equity (ROE)
First, let’s have a look at the ease of availability of the data. With the advent of the internet, such data is no longer hard to obtain for investors. Every listed company submits their share holding pattern to the respective stock exchange. It is mandatory for all companies to disclose their shareholding pattern at the end of every quarter. So, you can find the shareholding pattern of any listed company on the NSE website. Return of Equity and the tax rate both are readily available from the financials of the company. However, calculated ROE is readily available on many financial websites. Dividend history is also readily available on the NSE website. You can access the dividend history from the last ten years with a single click.
