Most of us by nature or our outlook are a glass half full type of people and when we invest we tend to think about growth of the company, can it continue to make profits and pay dividends and that is a good. However in all investing there are people who are only in for the money that will flow directly to their pockets and everyone else be dammed. These people have the ability to jump on the latest trend and make a compelling story which sounds true. An easy example is climate change is coming and companies have to do something to reduce their carbon footprint, what we do not know but firms will be pitching all types of solutions, some of them are frauds.
In the public stock markets, one requirement is information must be released on a regularly basis of how the company is doing and how does it make its money. Because the information is public, there are numerous people trying to determine is it true or reflect reality or is it made up? Investors like to think that because reputable firms are behind the work, the numbers reflect reality, but it does not always happen.
In an article by Matthew Goldstein and Kate Kelly of the New York Times News Service, the writers profiled Nathan Anderson’s firm called Hindenburg Research. The firm analyzes hundreds of public companies to see what they are doing and write reports if they believe the numbers are fraud or very suspect. At the same time the firm establishes a short position in the company and if enough people believe, the share price will fall and the company makes money because the truth came out.
Nathan Anderson of Hindenburg Research, Carson Block Muddy Waters and Andrew Left of Citron Research are three of the leading names you might see in the media and their companies and all of them had various success. Hindenburg Research highest profile is the fraud at Nikola Motors. The former President Trevor Milton was charged with securities fraud. The company has been restructured and may produce an electric vehicle for production as opposed to Mr. Milton’s lifestyle.
Mr. Anderson said in the world of SPAC deals, there is a lot of fraud, but it is important to remember the basic lesson from starting a small business (revenues – expenses = profits). It is easy to have expenses, it harder to have revenues which cover expenses without raising more money to pay for expenses. Remember how does the company make money? is it making money? When you are examining companies with the latest trends try to be a half empty type of person.
Linking to dividend paying stocks, one of the rules in investing is try not to lose money. One method to do this is buy profitable companies which can pay a dividend, as long as the dividend is being paid, you have little to do but look leisurely for alternatives.
There are more questions than answers, till the next time – to raising questions.