The Motley Fool

Use These 4 Senses to Detect Trouble in Companies

As investors, we need to be constantly alert for news or corporate events that may negatively affect the companies in our portfolios. I check the SGXNet announcements page on a daily basis and also continually read up on trends and developments concerning the industries in which my investments operate.

Aside from reading news articles and corporate announcements, we also have to make use of our senses in order to spot potential trouble. I will detail below how we should make use of four of these senses.

Bitter taste in one’s mouth

When speaking with C-suite executives, be alert for aspects of what they say that may leave a bitter taste in your mouth. Some examples might be poor explanations for fundraising activities (such as rights issues) undertaken by the company, incompetent handling of customer complaints resulting in lost business, or insufficient justifications for the escalation of costs that resulted in significantly lower profits.

Investors need to be wary when management’s comments leave a bad taste, as this may imply that the manager either has something to hide, or is woefully incompetent in handling questions.

Seeing is believing

By walking around your neighbourhood malls, you can tell if something may be amiss. Investors who invest in real estate investment trusts that hold retail malls in their portfolios should make note if certain malls are crowded with customers and if there are many vacant units, or if the mall is almost fully tenanted out. If a mall is seeing very poor footfall and is also mostly vacant, you can be sure it is not generating optimal revenue for the unit-holder.

Smelling a rat

When reading through corporate announcements, we have to keep our antennae up and ask ourselves if what we are reading makes sense. The business world is littered with flimsy excuses and explanations that don’t hold water, and that’s when we should use our noses to smell a rat. In case something really does stink, investors should take it up with the investor relations department to obtain further clarification.

Hearing negative comments

Investors should keep their ears peeled when chatting with other respected value investors. Sometimes, they may have negative information or news on the company from trusted sources. The important thing is to ensure these investors are reliable and verify the source of said negative news flow. If investors do hear something that may upset their investment thesis, they should immediately revisit their thesis in order to protect their capital.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.