In stock markets investment ideas are generated from news and events. While analyzing the event one of the most useful question is "what's in it for me?" Me being the common shareholder. Let's discuss an example because examples explain things better :)
What about me?
A company just announced a mega asset sale at premium valuation, one of the largest deal of its kind in the sector in a long time, which sounds like a great news .. time to take a big bet .. but hold on, this is not sufficient information for making an investment decision.
To decide whether to invest or not in this company based on this news is to find out "what's in it for me?" What is the promoter of the company going to do with all the cash received from the deal. Let's consider the simplest case first. If the company management says something like they want to use atleast part of the cash to reward the shareholders by paying out a handsome dividend, then sure it is great news. Management is shareholder friendly and is willing to share wealth with the shareholders of the company so there is something in it for you. It is worth an investment consideration.
If the management says that they want to use the entire cash consideration for retiring debt or immediate expansion plan, it will benefit the shareholders of the company not immediately but in long term in the sense that the company will have a healthier balance sheet due to debt reduction or higher revenue due to business expansion hence higher profits and better valuation for the stock price. But this should also raise a red flag, why? Well debt management and business expansion is part and parcel of any business cycle and will always keep going on. How funds are utilized into these things is opaque to the shareholders. If even after such a historic event in the company the management is not willing to share even a small fraction of their gains with the shareholders in a direct and transparent manner, then atleast you can conclude that the management is not shareholder friendly and will always try to retain the profits within the company. So this is not the best of investment.
If the management is completely non-transparent and tight-lipped about the cash utilization or has a very abstract in-the future plan and is retaining all the cash within the company, the only thing you can be sure about is that "there is nothing in the deal for you" Then all is not well and there are better companies and management to invest your money with. You must definitely not invest in this company. If you already have invested in the company in anticipation of the deal, consider exiting and black listing this company and all other group companies run by the same people.
Beware of the good news trap
Note that many investors fall for this good news trap committing large investments just on the announcement of the good news without analyzing what is in it for them and come back empty handed and disappointed. Sure the news could be great for the company and its promoters, what you need to figure out as a shareholder before investing is that , is the news good for the common shareholder of the company.
So what do we learn from this simple question
Great companies, great management treat each shareholder as equal owners of the company and share the successes transparently and happily and take great pride in it. If a company or its management is not able to prove this then it does not merit investment of your hard earned money. Basic simple check to identify and be part of a great long term secure success story, isn't it ?
What about me?
A company just announced a mega asset sale at premium valuation, one of the largest deal of its kind in the sector in a long time, which sounds like a great news .. time to take a big bet .. but hold on, this is not sufficient information for making an investment decision.
To decide whether to invest or not in this company based on this news is to find out "what's in it for me?" What is the promoter of the company going to do with all the cash received from the deal. Let's consider the simplest case first. If the company management says something like they want to use atleast part of the cash to reward the shareholders by paying out a handsome dividend, then sure it is great news. Management is shareholder friendly and is willing to share wealth with the shareholders of the company so there is something in it for you. It is worth an investment consideration.
If the management says that they want to use the entire cash consideration for retiring debt or immediate expansion plan, it will benefit the shareholders of the company not immediately but in long term in the sense that the company will have a healthier balance sheet due to debt reduction or higher revenue due to business expansion hence higher profits and better valuation for the stock price. But this should also raise a red flag, why? Well debt management and business expansion is part and parcel of any business cycle and will always keep going on. How funds are utilized into these things is opaque to the shareholders. If even after such a historic event in the company the management is not willing to share even a small fraction of their gains with the shareholders in a direct and transparent manner, then atleast you can conclude that the management is not shareholder friendly and will always try to retain the profits within the company. So this is not the best of investment.
If the management is completely non-transparent and tight-lipped about the cash utilization or has a very abstract in-the future plan and is retaining all the cash within the company, the only thing you can be sure about is that "there is nothing in the deal for you" Then all is not well and there are better companies and management to invest your money with. You must definitely not invest in this company. If you already have invested in the company in anticipation of the deal, consider exiting and black listing this company and all other group companies run by the same people.
Beware of the good news trap
Note that many investors fall for this good news trap committing large investments just on the announcement of the good news without analyzing what is in it for them and come back empty handed and disappointed. Sure the news could be great for the company and its promoters, what you need to figure out as a shareholder before investing is that , is the news good for the common shareholder of the company.
So what do we learn from this simple question
Great companies, great management treat each shareholder as equal owners of the company and share the successes transparently and happily and take great pride in it. If a company or its management is not able to prove this then it does not merit investment of your hard earned money. Basic simple check to identify and be part of a great long term secure success story, isn't it ?
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