Tuesday, January 13, 2009

The Satyam Saga - Key learnings

Lot has been written on the Satyam Saga and I had earlier posted on it when the Maytas deal was announced by Raju. The intention of this post is not to run threadbare on the scam as there is enough information in the public domain on this. I intend to focus on two key learnings for me from the scam

Lies, Damned Lies and Management.
This event has reinforced by belief that the starting point of any stock selection process is to understand the management and its track record. The ethical values that the management has displayed both in terms of their business dealings as well as dealings with the shareholders.

Its amazing how if a friend, relative, neighbour of ours asks us to become a partner and invest money in a business opportunity, our first instinctive reaction is to check whether we trust the person. The next step is to check whether the business opportunity is attractive. But when we buy stock which is effectively becoming a partner we seem to overlook this variable.

In my experience a detailed running thru the balance sheet more often than not gives you a flavour of the management and how they value the various stakeholders.

Management quality could become a go-no go criteria or should atleast form a significant weightage in the stock selection process.

Black & White Swans
I had earlier written about how I factor in Black Swans in my investment strategy. The Satyam event is a classic Black Swan event that nobody saw coming. This has reinforced by belief in my previous hypothesis that it is critical to build a portfolio factoring in a adequate “ Margin of Safety” to ride out the black swans that one might encounter in the investment journey.

Also being able to accept Black Swans ( negative surprises ) and acknowledge White swans ( positive surprises) helps in building a temperament which doesn’t get unduly ruffled by the vagaries of the market.