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.


Ron Robins said...

Ethics and good human behaviour cannot be legislated. It simply represents the collective consciousness of society. What needs to happen is for society to recognize that inner spiritual development takes precedence over other forms of education.

Now wth reference to ethics in business and investing, I believe that when we invest in a company, or many companies in the case of a mutual fund, we share in the responsibility for the activities of those companies as well as participate in the outcomes of their corporate activities. So, anyone valuing their personal or spiritual growth has to take these things into account when investing.

Also, if everyone invests according to their personal values, then, since so many of our core values are alike — and are supportive of higher ideals — that in the long run, only companies employing these higher values will truly prosper. And there is real evidence of this now.

I advocate, teach and write on the subject of ethical investing -- and have a popular website that has unique information which might interest you. It includes the latest global green and ethical investing news and research. My site is at www.investingforthesoul.com

Best wishes, Ron Robins

rev said...

hello ninad

I have a query. As per sebi norms a company where promoter holding is more than 90% has to be delisted or promoter holding should be brought down right?

What happens in case the company is owned by the Government.

I am refering to Engineers india ltd. Promotor holding is 90.4 %...

If it aint too much trouble could you please clear my doubt?

thanking you in advance


Ninad Kunder said...

Hi Ranjith

I had spoken both at NSE and SEBI and to be honest I havent got clear answers on the delisting norm on some of the other cases. So not in a position to spell a concrete answers for Engineers India.

I m also grappling with this query.



Alex said...

I couldn't agree with you more about the need to focus on quality of management when making an investment decision. However I'm not entirely sure this qualifies as a black swan event.

For me the most interesting part of the Satyam saga has been how quickly the markets have absorbed the "shock". Admittedly we had a few days of heavy selling but given that we still don't know the level of auditor involvement or the duplicity of the banks I'm surprised the fall-out hasn't been much bigger. My instinct is that although Satyam itself was a shock, the nature of the event was not as shocking as people claim and that the markets are are working on the assumption, right or wrong, that SEBIs peer reviews won't dig too deep into other peoples books.


Ninad Kunder said...

Hi Alex

Its not a black swan event in the macro sense but specific to the stock it is one.

So if you had the stock in your portfolio clearly it is a event that one wouldnt have thought of. The point is that beyond the macro level surprises, there is the individual stock level black/white swan events that we will encounter in the course of our investing life. If you can restrict the downside loss of a black swan event by build a margin of safety into individual stocks then the positive surprises on the portfolio will ensure that the portfolio will outperform.



moneyvidya.com said...


Thanks for the considered reply and I agree that at the stock level it was an unforeseen event, the magnitude of it was anyway, so could definitely be classified as a black swan.

However, when you talk of building in a margin of safety at the stock, level how could this have been done for Satyam?

Are margins of safety not based on intrinsic values which can only be estimated from the fundamentals. Do you know of a way to create or measure a margin of safety for an investment which protects you from the possibility that all your knowledge of the fundamental properties of the security are incorrect?

I ask from genuine interest rather than in the desire to challenge your well written post.

Kind Regards
Alex (no longer a google blogger)

Ninad Kunder said...


Let me at the outset state that the objective of writing this blog is to garner a audience which would challenge and question my thoughts and assumptions. It will enhance my personal learning curve and hopefully open up fresh insights. So feel free to challenge and I would encourage you to do that.

On your question regarding building a margin of safety at a individual stock level, let me come back to you with a independent post on that.



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