The ethics conundrum

Many moons ago, I was offered to be taken as a partner in a company which was started and continued to be run by someone I admired. Given the timing (personally for me), it was indeed a very tempting offer. Then again, I also knew how he treated clients (and their monies) and as much as it would have been profitable, I thanked him for the offer but declined to be part of it.

Years ago, an Industrialist bought an Airplane for his personal usage using funds from a listed company. Unfortunately for him, shareholders objected and the company was a US listed one. The kind Industrialist simply transferred the asset to his listed company in India.

This post was inspired by an Investment Adviser who tweeted and I quote

The biggest co in India grew by corrupt ways. Also, created Huge shareholdr wealth & many millionaires.

There is nothing wrong with the above statement for investors who invested with the company in its early years got some pretty good returns. But then again, so goes for investors in companies like “Infosys” among others which prospered without the need to cheat the government the way the big company is rumored to have.

But what is overlooked is that this is a case of Selection and Survivor Bias. A steel company some time back tried to bribe its Banker to have its way. But not all things go as planned and the stock plunged more than 90% from the peak.

Over the years, hundreds of thousands of companies have vanished with investors monies. Some would have had genuine business difficulties, some just bad luck and quite a few I am sure were there to take advantage of the cluelessness of investors and claw as much money as possible.

It’s here that the philosophy of investing you follow becomes so important. If you are an investor who looks at numbers and willing to bet sizeable sums on companies you like, would you really want to partner yourself with a cheat. Today, he is cheating others, tomorrow could be your turn.

Momentum traders like me on the other hand rarely bother to check the background of the promoters. If the stock is going up, it’s a Buy. If it’s falling, better get out for there are always better options available elsewhere. In that sense, we are blind and may be willing to be shareholders (for however short a period of time) of companies that seem to have crooked managements.

But I am digressing. Great Companies with honest management can have mediocre returns while Lousy companies with dishonest managements can give great returns. While on the long term, there is a very strong correlation between ethics and returns, on the short term, no one gives a damm about it, especially when the markets are running like crazy.

Raymond is in the news for its corporate (mis) governance. But this is a stock that recently broke above its high of 2005. Breakouts are good and one that comes after 12 years could easily work wonders. But if it doesn’t, there is always an exit plan that hopefully ensures that we get out and not become a lifelong investor in the stock. But if your allocation is no more than 4%, should you give a damm about whether the promoter is a chor or not for finally you are measured not in the kind of companies you invested but the return you generated on your investment.

Food for thought, eh?