If recent business history has taught us anything, it is that boards and management can be wonderfully creative. Some have and others continue to invent new and creative ways of destroying and losing vast amounts of shareholder money, while being paid handsomely and expropriating funds for themselves.
Stocks from companies like these are called capital killers and can sneak into investor portfolios if the warning signs are not detected. Avoiding these stocks will increase portfolio value and save to effort of putting a stop loss on each stock position. Australian investor Howard Coleman suggests the following three indicators to keep capital killers out of portfolios:
Take a full economic cycle of ten years into consideration when looking at a company’s business performance. Watch out for the following warning signs:
In order to understand a company’s strategy and how it drives profits and losses, it is essential to thoroughly understand the current business model. Companies exhibiting the following tendencies are potential capital killers:
People run businesses and that is what you’re investing in. As an investor, you need to feel 100% comfortable with the business’ strategy, focus and goals. It’s important to understand what motivates the management. Avoid boards and management teams exhibiting these management capital killer characteristics:
Remember to carefully look at past business performance, the business model and most importantly board and management motivation to detect and keep capital killers out of your portfolio.