Almost every investing strategy takes into account well-known signs of risk, such as falling profits, dividend cuts, police or security commission investigations, and so on. But wise investors will also stay alert for more subtle signs of coming problems. Here are 3 hints that could serve as a warning that a company may soon be facing big trouble.
- Strong reactions to outside criticism: When outsiders criticize a company’s accounting and the criticism is unjustified, most corporate insiders simply ignore it. But if insiders have something to hide, they may protest far too loudly — that is, threaten to sue critics of their accounting practices, in hopes of shutting them up.
It’s sound investing strategy to avoid companies that attract accounting criticism, but all the more so when insiders react with outrage and threaten lawsuits. You probably won’t miss much profit by staying out, but you’ll avoid some of the market’s worst disasters. - Too much focus on corporate prestige: When companies pay to name buildings after themselves (including gigantic sports venues), or build excessively costly head offices, it may mean they are pursuing prestige at the expense of profit.
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- The middle-age-crazy syndrome: Many public companies are run by middle-aged males who reached their high-paid positions by working hard, marrying young and generally putting career ahead of their family and personal lives.
In mid-life, all too many are overwhelmed by a desire to make up for all the fun they’ve missed. Some will go on to achieve a healthy balance in their lives, possibly following a divorce and remarriage. But others divorce themselves from business reality. They take on foolish business risks, at great cost to themselves and their shareholders.
Hypothetical example: If the chief executive of, say, a steel plant, announces that the company is going into feature film production, you have to wonder if he has uncovered some great new secret of making money in films, or if he simply wants a socially acceptable way of meeting actresses.
Successful investors have this investing strategy in common: they always remain alert for hints of troubles in their stocks. By the time dividends and earnings disappear (or the police come knocking on the corporate door), it may be too late to get out without a big loss. We alert readers to all the indicators that could spell risk – or reward – in our newsletter that takes a conservative approach to aggressive investing, Stock Pickers Digest. If you buy aggressive stocks, you really should have a subscription to Stock Pickers Digest. The latest issue gives you our full analysis, including clear buy/sell/hold advice, on 20 stocks that may be suitable for the part of your portfolio you devote to more aggressive stocks. What’s more, you can get this issue free. Click here to learn how.
