As investors, we all understand that companies will sometimes miss profit forecasts or suffer problems delivering on growth plans. These can be uncomfortable and are sometimes more surprising than they should be.
However, our research suggests that it’s fairly straightforward to develop a consistent approach for handling such issues in our own portfolio.
What’s often far harder to handle are the kinds of problems that sometimes arise seemingly out of the blue. Recent weeks have seen a number of these.
The recent cyber attack at Marks and Spencer (LON:MKS) is an example, as are the Daily Mail allegations of animal cruelty at pork producer Cranswick (LON:CWK). The share price reaction has been relatively modest in both cases. But neither issue is definitively resolved yet.
Further up the risk spectrum, an apparent failure of risk management at small-cap financial Argentex and an unexpected outcome to a regulatory investigation at Jarvis Securities have both left investors nursing painful and probably irreversible losses.
These events have made me think more carefully about how to respond to such issues when they arise.
In this piece I want to highlight some of the pros and cons of different approaches, as I see them. I’ll also suggest a checklist of factors to consider when such issues arise.
What can go wrong?
We can’t predict the exact problems (or changes) that will strike companies in which we’re invested. But there’s very little that’s new under the sun. Most unexpected events will fall into one (or more) of the categories below.
Significant regulatory issues (especially financial)
Allegations of corruption, fraud or other wrongdoing by the company or its senior executives
Major accounting irregularities
Outsized acquisitions
Major lawsuits
Sudden strategy pivots triggered by external events
Events that prevent a company from trading normally for an extended period of time (e.g. cyber attack, geopolitical events)
Serious debt issues
Sometimes these problems look like bombshells from day one. Sometimes, they creep into investors’ awareness through carefully-worded RNS statements and footnote disclosures. They may escalate over time – in my experience, it’s surprising how often an apparently isolated issue becomes a cluster of problems.
In these situations, I’ve found there’s a tendency for investors to take a curiously disjointed view…
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