Beware: This worrying trend could destroy your wealth in 2018

by , 11 December 2017
Beware: This worrying trend could destroy your wealth in 2018
In just a couple of days, around R183 billion was wiped off Steinhoff's market cap. The company's shares have lost over 80%. CEO Markus Jooste resigned with immediate effect.

Investors, asset managers and fund managers lost a fortune!

So what exactly happened?

"Steinhoff has involved itself in some shady dealings which involves accounting irregularities and overstating profits.”
This is big, this isn't some minor tax issue. There is clearly serious accounting fraud involved. And it’s hurt the reputation of Steinhoff for a very long time.
Although, there’s insurmountable evidence that Steinhoff has been doing dodgy things, the full investigation is not complete, so I’d rather wait for that before making any comments.
The worrying thing is, Steinhoff isn’t the only company reeling in costly and damaging scandals.
In fact, allegations of fraud, “accounting irregularities” or “cooking the books” has become a worrying trend in 2017 and could well happen again in 2018.
Let me explain…

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Steinhoff isn’t the only company reeling in costly and damaging scandals – Here’s four other SA listed shares
#1: Naspers: Recently, Naspers has been embroiled in a scandal involving its business Multichoice. Massive amounts were paid to Gupta-owned companies, including ANN7 and certain negotiations between MultiChoice officials and the SABC board may have influenced policy decisions in government.
Also, MultiChoice paid the SABC more than R100 million per year to include the SABC News Channel on the MultiChoice bouquet.
Right now, the company is being investigated. This could be the next crash like Steinhoff. The worst part is, the company is not taking these allegations seriously in the interest of shareholders.
#2: EOH: The company was embroiled in a scandal involving corruption allegations with welfare agency Sassa. This saw a massive sell-off ensure from investors.
#3: Consolidated Infrastructure: Over the past few years, CIL has consistently grown revenue and profits.  But this year, the company ran into massive problems which saw its share price crash.
So, what happened?
CIL released a trading update on 31 August which stated its headline earnings would fall between 25% and 35%. In the statement, the company indicated that it would publish results on November 8. But this did not happen.
Instead, the company published a second trading update, which stated earnings would now fall between 50% and 55% and that the results would be published on November 15. 
Fast forward to November 14. The company published a third update, which referred to a board meeting that had taken place the day before and a number of issues that related to profit and loss recognition over its multi-year contracts were raised.
The updated also mentioned issues around being paid, cost overruns, and lower than expected revenue due to “uncharacteristically poor execution”, which was concerning.
In short, CIL left investors in the dark and in fact, at their annual general meeting, reassured investors that the business was still growing. But the company’s updates said otherwise. Consequently, its share crashed.
#4: ADVtech: On 1 December, ADVtech released a statement announcing activities of fraud within the company’s school division.
These activities resulted in an over-statement of revenue, an understatement of costs and the theft of cash.
Because of this fraud, the company lost around R35.5 million. The thing is, you can give ADVtech credit for voluntarily informing shareholders about the fraud. 
What should investors do in 2018 to combat this trend?
  1. Never invest all your money into one share – use position-sizing. This is a useful tool to limit the amount you put into each stock. A golden rule is to never invest more than 5% of your portfolio in one stock. 
  2. Attend company annual general meetings (AGMs). As a shareholder, you have the right to attend a company’s annual general meeting and ask questions or scrutinize management. You have the right to know exactly what’s going on in a company and if there are any major problems affecting it.
Legendary investor and one of the first shareholder activists Benjamin Graham once said…
"Shareholders are justified in raising questions as to the competence of the management when the results (1) are unsatisfactory in themselves, (2) are poorer than those obtained by other companies that appear similarly situated, and (3) have resulted in an unsatisfactory market price of long duration."
In other words: If your investment is underperforming, you have every right to demand better. On more than one occasion, Benjamin Graham did exactly that and you must too.
Always remember, knowledge brings you wealth,

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