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Your five minute guide to deciphering director's secret boardroom language

by , 19 September 2013

Have you ever looked at an annual report for a company and thought to yourself that you didn't have a clue what the directors are trying to tell you about the company's performance?

Well, sometimes that's the goal - to hide the real facts from you with colourful language or technical jargon…

If you're not careful, you'll be sucked into the world of half-truths and subtle lies. That's why you need to understand this language to make sure your investments don't go down the drain…

That's why I've compiled you this list of terms to look out for when directors or management of the companies you invest in make public comments.

Keep your eyes peeled and soon you'll see how the truth gets twisted. Using this you'll be able to make better-informed decisions and you might even get the inside scoop on big happenings at companies by just reading between the lines!

5 phrases directors use that could change the way you invest forever

Phrase #1 “Once off expenses” / “Goodwill impairments”

Once you see news coming out and the company had “once off expenses” and “goodwill impairments” warning lights should flicker!
It’s Okay if a company reports these once or maybe twice in a ten year period. But I’ve seen companies blame bad results on ‘once off’ expenses every year for years on end…

In fact, a now bankrupt airline I know managed to use ‘once off’ expenses to make its actual profit of 0.5 cent per share look much better by reporting earnings excluding once off costs of 22 cents per share!

Phrase #2 “Earnings are depressed due to difficult market conditions”

You’ll definitely hear this one a lot…

This is what management says when they’re too lazy to explain why a company REALLY isn’t making the profits it should.

Watch out for EMPTY statements like these. Unless management is willing to explain how it will try to correct the situation in the next year.
For example there’s a small cap construction share I’m eyeing that used this line in its last statement to the public, but it at was at least willing to also say that it planned expansion into a niche market which will help it remain competitive for the year to come.

Phrase #3 “We’re rewarding investors with special dividends”

When a company has made a lot of cash, specifically with the sale of a large business unit they often pay out special dividends.
But a special dividend carries a note of its own…

I feel these are bad… You see special dividends often means a company does not have anything better to do with its money.
You could argue that the cash in your pocket is better than putting it into a failed project, but the companies I like to invest in should have innovative ideas to grow its profits with cash like this!

Phrase #4 “The coming year will be a difficult one”

If ever you hear a company director say something slightly negative like this, admitting that his company’s profits may fall in the year to come you should stay miles away from the company. You see, if the directors don’t even have faith in their company doing well you definitely shouldn’t!

Phrase #5 “We are the market leader in xxx”

Whenever you hear a director of a company saying this, look the other way and silently have a chuckle! This reminds me of parents that no matter what will always believe their kid is the smartest, fastest and strongest kid on the block no matter what.

Almost all directors believe their company is the best at what it does. But the truth is there can only be one top company in a sector. So don’t pay too much attention when this claim is made! Rather judge the claim by looking at the cold hard facts.

Make sure you follow these tips to invest successfully…

The top management of a company are the people that look after it on your behalf as the shareholder. They have a massive effect on the future success or failure of the company. So you need to make sure about their integrity.

You need to check that their communication with the market is honest.

And if you see a string of misleading statements and promises that just never seem to come true – walk away from the company…

The easiest way to look into this is to look at the message from the CEO in the company’s annual reports over a couple of years.

See whether they deliver on their word concerning growth? Did they man up when the company didn’t deliver or did they try to explain it away with mumbo jumbo like “We had a very difficult trading environment” or “We made a great profit if you exclude once of items like foreign exchange losses”.

I hope this helps you to decipher the language used by the people who run the companies you invest in. Watch out for these phrases and you’ll certainly shield yourself from losses in the future.

P.S. Looking into directors, the way they communicate with shareholders and the promises they make is an important part of my Red Hot Penny Shares POWA strategy. If you’d like to find out more about three specific companies with great management that keeps on delivering make sure to meet me at the FSP Invest Symposium 2013: A world of opportunities. I’ll be revealing my research and info from private meetings with these companies that are about to conquer Africa… Click here to find out more.

Your five minute guide to deciphering director's secret boardroom language
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