Avid water surfers and swimmers will tell you that the first thing they look for before going anywhere near water is the warning signs: dangerous currents, sharks, algae, jellyfish etc. From time to time, there are flags raised to show the level of risk involved with going near water. When a red flag is raised, rough conditions such as strong surf and/or currents are present and so surfers know they are being discouraged from entering the water.
The same applies to investments. Know when the red-flags are raised. Before we can talk about how to dabble in stocks and bonds, we need to tackle the issue of red flags.
Truth be told, your friend who works at the company or your wife at the stock exchange are powerless to do anything if/when the boat is sinking.
To put this into context, I have to share this story. Joan was Feltex Carpets’ board member a year and half before the company went into receivership (it could not meet its financial obligations). Her account of what transpired is what I want to highlight today, in the hope that you and me can smell danger from a mile away. From her story one lesson is clear: When the red flags are raised, no matter how sugar-coated the news appear in media, run! Sell your shares and park them someplace else where there is no noise.
There are 3 red-flags that might have made me take off at the speed of ten dogs:
- She was appointed a month before the Feltex IPO. That was way too little time for her to come in and prudentially endorse the whole process. I’d say she came in as a pawn to complete the attractive, forward-looking picture of a carpet company appointing a female director, which was quite rare back then in 2004. (It’s now 2017 and we’re still lobbying for more females on company boards!). She came in merely to rubberstamp processes that were agreed to in her absence.
- There was a profit downgrade during her time in the board. Reasons for a profit downgrade can be many and varied. Understandably, the carpet business was in the troughs but the major issue was Feltex had overextended its lines of credit with their banker. And not meeting their profit forecasts (by $9m!) was definitely a very big blow.
- Joan then hastily left soon after the profit downgrade. When you see board members stepping down without a word, especially so soon after their appointment; you can be sure that there are squabbles in the boardroom that they are not willing to divulge for the good of their career and/or personal standing.
And sure enough, a mere 15 months after Joan’s departure, slightly over 2 years after their IPO, Feltex carpets failed.
While I commiserate with a fellow woman, I believe it was poor judgement on her part to agree to an arrangement that clearly shows that she was getting on the ride as a second-class citizen. In a way, her opinions surrounding the most crucial process of the business didn’t matter. At least that’s the message I get from this all powerful male delegation hiring her a mere 30 days before the IPO. And fairly so, NZ courts exonerated from any wrongdoing in the decision that made 8,000 investors lose $250m when Feltex went under.
But the lesson is clear for all of us, when you choose to buy shares on the stock market, keep yourself updated on the announcements they make – big and small, and know when it’s time to walk away.