Tuesday 28 October 2014

How to protect yourself from dodgy bookkeeping in companies?

A campfire

I have now had four companies that arrive with serious adjustments of their balance sheets. Each time what I thought was value in these company turned out to be air castles that could be swept away with a bit of wind or burnt in the campfire for that matter.

The first ones were my two banks Deutsche Bank and Commerzbank that needed to down adjust some assets. In both these cases the damage has been small for me since because the stock market had one way or the other already accounted for the decreases in book value and also for me it has been less dramatic since I did not really buy them due to the P/B value but I bought them due to that generally all banks were, valuation wise, completely pushed down.

The third one was Asian Bamboo that after having more or less no revenue all of a sudden decided to inverse assets into liabilities which caused the stock that was already well pushed down to be pushed down even further. Already that they were not making any revenue and were deciding to take the company into the real estate business instead of selling bamboo should have made me sell the shares asap but I failed to do so and therefore the asset to liability swap that they made was just the icing of the cake. My biggest mistake with Asian Bamboo, besides from buying them in the first place, was to increase my position while all this was going on.

I bought them very much due to their low P/E and P/B and by the look of things the P/E means nothing today and neither does the P/B since over night that can obviously be swapped around as they see fit. They also love to arrive with a new calculation of the "fair value" for the bamboo forests. I can tell you the fair value of something that is not being sold. It is a big fat zero.

The fourth and latest trouble is Eniro. The P/B has gone from being 0.2 to being 0.6. What I thought was that Eniro was a company that should at least have a fair value around P/B 1. This meant that I was expecting the share price to increase to reach a P/B around 1 and the factors of share price increase from P/B 0.2 made that interesting. Now with a P/B of 0.6 that interest is gone. Which then also means that I should directly sell my shares.

How can one protect oneself from these kind of things? At some point I was thinking that in big companies that can simply not happen... but DB and Commerzbank are big and they have had "adjusted" books. Lately Tesco (which I do not own) has also shown that book values have been adjusted... so obviously it is not a small company versus big company problem and it simply boils down to the management of the company independent of the size of it.

So how can one protect against is as a small investor? Is there a way? How do You protect yourself from companies making "adjusted" book keeping?

Should one go back to the idiot statement (only buy companies that an idiot can run because one day an idiot will run it) and only look at companies that have so great products because then even if the books are cooked at least the companies have been and still will be selling their products which means that they are more likely to out live the idiot currently steering.

How do one find out if the management of a company is honest, non idiotic mainly human? Human can be optional but the other two are crucial!


Anonymous said...

I don´t think it is possible to find those things out and the best approach is to walk away when it happens.

Fredrik von Oberhausen said...

Hmmm... You might be right about the first point and one the second point I think you are spot on. I am definitely bad at walking away from an investment when it has gone sour and I need to improve that part.