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Most of us have wondered, at some point, whether a decline in
the price of a stock we're holding is long term or a mere market hiccup.
Some of us have sold our stock in such a situation, only to see it rise
to new highs just days later. This is a frustrating and all too common
scenario, but it can be avoided if you know how to identify and trade retracements properly. What Are Retracements?Retracements are temporary price reversals that take place within a larger trend. The key here is that these price reversals are temporary, and do not indicate a change in the larger trend.
The Importance of Recognizing RetracementsIt is important to know how to distinguish a retracement from a reversal. There are several key differences between the two that you should take into account when classifying a price movement:
Profit taking by retail traders (small block trades)
Institutional selling (large block trades)
Buying interest during decline
Very little buying interest
Few, if any, reversal patterns - usually limited to candles
Several reversal patterns - usually chart patterns (double top, etc.)
No change in short interest
Increasing short interest
Short-term reversal, lasting no longer than one to two weeks
Long-term reversal, lasting longer than a couple of weeks
No change in fundamentals
Change or speculation of change in fundamentals
Usually occurs right after large gains
Can happen at any time, even during otherwise regular trading
Following news is relevant and important to the share holders of seed companies ,hence re-posting it here .
HYDERABAD: In what could prove a
major setback to the global hybrid seed giant Monsanto, India's agriculture
ministry has decided to control the prices of cotton seed, including the
genetically modified versions and their trait value.
The Ministry of Agriculture, Cooperation and Farmers Welfare on 7 December has
firmed up the Cotton Seeds Price (Control) Order 2015, terming it as aimed at
ensuring availability of cotton seeds to farmers at "fair, reasonable and
The move of the ministry comes in
response to a series of representations made by the domestic hybrid seed
manufacturers, who sought the government's intervention to rein in the American
seed giant Monsanto on trait value of Bt cotton seed. A Mahyco
Monsanto Biotech (India) spokesperson said the company just received a copy of
the order and was in the process of reviewing. "We will be in a position
to comment only after we understand the order in its entirety," said the
"As a leading player in India's
agriculture sector, Monsanto remains confident that the government will take
into account views of all stakeholders and will continue to encourage
innovation in Indian agriculture." The local seed makers moved the
agriculture ministry after the American hybrid seed giant Mahyco Monsanto
Biotech (MMB) refused to bring down the royalty payments and return the excess
royalties they paid from 2010.
The Indian hybrid seed producers appealed to Monsanto to reduce trait values
weeks after certain state government began fixing caps both on royalty amounts
the seed makers pay to obtain seed technologies and on selling prices of hybrid
cotton seed to farmers.
This decision may negatively impact the business prospects of previously suggested companies - Kaveri Seed Company and Nath Biogene - from this sector.
In what could prove a major setback to the global hybrid seed giant
Monsanto, India's agriculture ministry has decided to control the
prices of cotton seed, including the genetically modified versions and
their trait value.
The Ministry of Agriculture, Cooperation and
Farmers Welfare on 7 December has firmed up the Cotton Seeds Price
(Control) Order 2015, terming it as aimed at ensuring availability of
cotton seeds to farmers at "fair, reasonable and affordable prices".
In what could prove a major setback to the global hybrid seed giant
Monsanto, India's agriculture ministry has decided to control the
prices of cotton seed, including the genetically modified versions and
their trait value.
The Ministry of Agriculture, Cooperation and
Farmers Welfare on 7 December has firmed up the Cotton Seeds Price
(Control) Order 2015, terming it as aimed at ensuring availability of
cotton seeds to farmers at "fair, reasonable and affordable prices".
Law enforcement has crime scene investigators to tell
them the significance of a bloody fingerprint or a half-smoked
cigarette, but investors are often left to their own devices when it
comes to trying to figure out whether an accounting crime has taken
place and where the fingerprint might be. Now more than ever, investors
have to become forensic accountants
themselves if they want to avoid being burned by unscrupulous
accounting in a company's financials. In this article we will look at
some common signs, both obvious and subtle, that a company is struggling
and trying to hide it. Exaggerating the Facts. With all the big baths
that companies take, it's tempting to believe that Wall Street is the
cleanest place on earth. The big bath refers to the swelling of
in the wake of poor quarters. When a company is going to take a loss
anyway, they sometimes take the opportunity to write off everything they
possibly can. This is often compared to spring cleaning; the company
realizes losses from future periods and/or losses that were kept off the
books in previous quarters. This makes poor results look even worse and
artificially enhances the next earnings report. In this case, there is
no actual crime taking place, but it is a deceptive accounting practice.
However, the biggest problem with this practice is that once a company
has taken a big bath, income manipulation is a step away.
A company taking a big bath isn't difficult to evaluate in
comparison with other companies in its sector that haven't used
deceptive accounting practices. Generally, the company has a very bad
year followed by a "remarkable" rebound in which it begins to report
profits again. The danger comes when companies make an excessive write
down, such as claiming unsold inventory as a loss when it is probable
that it will be sold in the future. In this case, when the inventory
moves, the company would add the profits to their operational earnings.
This type of income manipulation makes it hard to tell whether the
company is actually rebounding or is merely enjoying the benefits of the
items they "erroneously wrote off". This type of write off is similar
to the difference between spring cleaning and burning down your house
for the insurance money, so any company that rebounds quickly from a big
bath should be viewed with suspicion.
Smoke and Mirrors. One of the
most prevalent approaches to corporate accounting is to omit the bad and
exaggerate the good. There are a number of subjective figures in any
financial report that accountants can tweak. For example, a company may
choose to exclude costs unrelated to its core operations when figuring
its operating cash basis - say an acquisition
of another company or purchasing investments - but will still include
the revenue from the unrelated ventures when calculating their quarterly earnings.
Fortunately, companies have to break down the figures, thus dispersing
the smoke and mirrors, but if you don't look beyond a few main figures
in a company's financials you won't catch it.
Finding the Accomplice There can be a number of accomplices to any accounting crime, but two popular suspects are special purpose entities (SPE) and sister companies. SPEs allowed Enron to move massive amounts of debt off its balance sheet
and hide the fact that it was teetering at the edge of insolvency.
Sister companies have also been used as a way to spin off debt as new
business. For example, a pharmaceutical company could create a sister
company and hire it to do its research and development
(R&D) (pharmaceuticals' biggest expense). Instead of doing the
work, the sister company hires the parent company to do their own
R&D - thus the parent company's biggest expense is now in the income
earned column and no one notices the perpetually debt-ridden sister
company. Nobody, that is, except those who read the footnotes. The footnotes list all financing related affiliates and financial
partnerships. If there is no accompanying information disclosing how
much the company owes to the affiliates or what contractual obligations
there are, you have plenty of good reasons to be suspicious.
Elder Abuse Sometimes when a
company is struggling, it starts dipping into financial reserves that it
hopes no one will notice. Target No.1 is usually the pension plan.
Companies will optimistically predict the growth of the pension plan
investments and cut back on contributions as a result, thereby cutting
expenses. When the pensions start coming due, however, the company will
have to top off the plans from current revenue - making it clear that
putting off expenses doesn't make them go away. A healthy company
pension plan has become critical as baby boomers near retirement.
Getting Rid of the BodyCompanies
may try to hide an unsuccessful quarter by pushing unsold merchandise
into the market, or into the distributors' storage rooms. This is
usually called channel stuffing.
This may save a company from a big quarterly loss, but the goods will
return unsold eventually. Channel stuffing can be detected in two
figures: the stated inventory levels and the cash meant to cover bad
accounts. If inventory level suddenly drops or the money for bad
accounts is drastically increased, channel stuffing may be taking place.
Fleeing Town Because the
Canadian and American markets are so intertwined, companies that trade
on both exchanges can choose which country's accounting standards to
use. If a company changes from the historical accounting standards for
that firm, there had better be a good explanation. The two systems,
while generally similar, account for income in different ways that may
allow a wounded company to hide its weakness by switching sides. Any
change in accounting standards is a huge red flag that should prompt
investors to go over the books with a fine-toothed comb.
Guilty Tongues Slip. Damning
statements are often casually mentioned in a company's financials. For
example, a "going concern" note in the financials means that you should
get out your magnifying glass and pay close attention to the following
lines. With the practice of overstating the positive and understating
the negative, a company admitting to a "going concern" may actually be
confiding that they are two steps from bankruptcy.
Unexpectedly switching auditors or issuing a notice that the CEO is
resigning to pursue "other interests" (most likely in the Cayman
Islands) are also causes for concern.
there are many interesting numbers in a company's financials that allow
you to make a quick decision about a company's health, you can't get the
full story that way. Due diligence
means rolling up your sleeves and scouring the sheets until you are
sure that those main figures are real. The best place to start looking
for bloody fingerprints is in the footnotes. Reading the footnotes will
provide you with the clues you'll need to track down the truth.
The biblical Ten Commandments were intended to act as a
driver's manual for the road of life. "Thou shalt not kill." "Thou
shalt not bear false witness." These are life's versions of the
stop-at-the-red-light-and-advance-when-safe rules of the road. In other
words, they are all guidelines to keep people out of trouble. Because
life's highways are full of potholes, blind turns and bad drivers, the
investing world also suffers from scandals, scams and dishonest
companies. Here are 10 commandments for the investing world designed to
help keep investors - and their money - safe. 1. Thou Shalt Set Clear Goals If
you don't have a purpose or a set of clear goals to guide your
investment strategy, don't invest. This sounds harsh, but there are so
many types, styles and flavors of investing that, without a particular
destination, you will be lost at sea. 2. Thou Shalt Put Thy Financial House in OrderTo
become a successful investor, you have to make sure that your personal
finances are in order first. Investing without a purpose is bad, but
investing when you have high-interest debt is much worse. If
you are drowning in overdue bills and credit card payments that you
can't meet, take care of those more serious problems before getting too
deep into investing. 3. Thou Shalt Question AuthorityInvesting is more about the art of asking and answering the right questions than it is about deciding when to buy and sell. CEOs, CFOs, CPAs, CFAs
and all the other acronyms that we use to classify Wall Street's
professional caste can't hide the fact that they are human, and that
humans sometimes lie. Analysts get kickbacks, CEOs get stock options and recent accounting scandals, show that impartial accounting is not guaranteed. To question authority, you will need to educate yourself,
especially on the subject of financials. Press releases are flakes of
snow that rain down on investors and melt away, but financials stick
around. Although financials can be tampered with, there is always a
trail left behind. 4. Thou Shalt not Follow SheepHerd mentality leads to destructive rampages down Wall Street. Investing passively
by sticking to funds, indexes and other mainstays of the coach potato
portfolio is a perfectly acceptable practice. The danger comes when
people move from being a passive investor to an active portfolio, but
they continue to stick with the behavior of being a passive investor.
is a lot of available information for such investors - much of which is
true - but accepting it with an uncritical eye and neglecting to check
it yourself is what leads to herding. This includes getting the latest
and greatest stock tip from your Uncle George. A
person can effortlessly become one of the investors that the analysts
shepherd into various "must-buy stocks" after they have become
overpriced. This is how investors find themselves in the herd when
skittish investors flee, causing the stock to plunge farther than it
should have (whereupon a more astute investor buys a bargain off of your
loss).When people buy cars, they try to find the best value for the lowest
price; when people buy stocks, they only see the price and, ironically,
gravitate towards rising prices. If you are going to invest, you have to
check things for yourself in order to find the true value and get the
bargains. This takes more time, and it could even cause you to miss out
on early gains, but it will tell you when to stay out or when to sell
well before the herd hears the bell.
5. Thou Shalt Be Humble If you
take the first four commandments to heart, there is a good chance that
you will perform better than the majority of individual investors and
many of the professionals. But sometimes, particularly during a bull market,
gains are not dictated by investor actions as much as by having money
in the market, so don't allow yourself to become overconfident.
Overconfidence often leads to overtrading, taking unnecessary risks and
eventual losses when the bull turns bear. Also, remember that you incur
commissions every time you trade - this expense can often erase profits
or increase losses. 6. Thou Shalt Be Patient Patience
is a virtue for a good reason: It pays for itself. When the market
dips, or even when a particular stock dips, there are always investors
who panic and sell. Selling should be treated just as seriously as
buying. If it is just a bump, ride it out. If there is truly a problem
with the stock, take your time as well - you may find a way to use it in
a gain-loss transaction that will save you taxes. By the time you hear
it, bad news has already settled in - taking your time isn't going to
make it much worse. 7. Thou Shalt Show Moderation Investing
too much is not a problem many people have, but it can happen. It is
said that the pain of a loss has twice the emotional strength of the
pleasure of a gain. For some people, this results in pulling out of the
market prematurely, as mentioned above. For others, losing propels them into successively riskier
ventures in an all-or-nothing attempt to win those losses back. Losses
are hard to take, but look on the bright side: You can sell a loss to
offset a gain in another sector or, if it is in a retirement account,
you can use it as a tax write-off. Concentrating your money too much in
one area, either by sector, risk level or even keeping it all in the
stock market, is a sure way to see more of nothing than all in an
8. Thou Shalt not Ogle Thy Investment There
is nothing like a market correction or a general upswing to change
perfectly normal investors into fanatics who have market updates text
messaged to their cell phones every five minutes. As with Fidelity, the
axiom, "look, don't touch" is insufficient because the more you look,
the more you want to mess around with your investments. It is not clear
if it is a symptom or a cause, but this rabid over-monitoring almost
always leads to unnecessary churning in sufferers' portfolios 9. Thou Shalt not Court or Spurn Risk You should never put everything you have into futures, but you also shouldn't hold everything in Treasury bills. There is an appropriate level of risk for investors of every age and creed.
10. Thou Shalt not Make Heroes of Mere Men There is no perfect investor. Warren Buffett, George Soros and
Peter Lynch have all slipped up from time to time. That doesn't stop
them from being great investors who are worth studying and learning
from. That said, you should never mimic an investing strategy that you
do not fully understand.
There is too much guru-ism going on among investors - so much so that
credentials are often lost beneath book titles in which the word "rich"
is prominently featured. As with the early caution against trusting
authority, you have to question everything. Even if a strategy works for
a certain period of time, once it becomes widespread, it skews the
system. For example, the publication of Lynch's tenbagger
strategy has led to too many people searching for those stocks, leading
prices to become inflated to adjust for the non-market driven demand.
Skeptics survive on Wall Street much longer than believers.
The Bottom Line Praying or
getting behind the wheel expecting everyone else to follow the same
rules you do are both acts of faith. Investing, in contrast, requires
practice. To be a good investor, you have to make doubt a part of your
creed and make double-checking a ritual. These guidelines should help
you on your way. Happy driving.
In stock market investment, patience is necessary. If you don’t
demonstrate patience, you will either miss out on opportunities to buy
securities at the right price, or you will sell prematurely and lose
money in the market. Whether you are new to stock market investing or
have been doing it for years, taking your time and making smart,
well-thought out decisions will help you achieve greater success.
Accordingly, here are three things you should focus on to cultivate
patience when investing: 1. Knowing when to buy
Determining when is the best time to purchase new securities should
involve lots of research and careful consideration. You will have likely
studied past performance, fundamentals and identified the ideal entry
point. If, however, as you wait for the price to come down, it suddenly
starts edging upwards, you should not panic and place an order in haste.
By doing this, you not only give up potential profit, but you also
nullify all the research and planning you have done up till that point.
The point is that once you set a purchase price, you should stick to it.
The whole reason you do research is to avoid guess work and impulse
decisions. Emotional stock market investing will eventually lead to
disappointing returns. Investopedia explained that investors who violate
their discipline can end up in ruin. As such, that’s why sticking with a
predetermined investment strategy will help mitigate the losses that
result from emotional investing, lack of patience and failing to look
ahead. Exhibiting patience is not always as easy it sounds, but the best
investors and traders are able to trust their own discipline. By using
sound methodologies and allowing your research to serve your strategy,
you avoid buying prematurely. Remind yourself that patience is the most
important investment discipline. 2. Knowing when to sell
Zentrader pointed out that private equity is consistently one of the
highest performing asset classes because investors buy and sell when
prices are optimal. They purchase companies and securities at a bargain
and then hold them for a full business cycle. When the investment has
appreciated enough, the investors sell them. Selling when conditions
have improved substantially is how to make a huge gain. What retail
investors should learn from this example is that, having bought a
security at the right price, the next thing to do is wait. If you have
done your research, then you have determined the best time or conditions
to sell. You should hold steadfast in that decision. According to
Investopedia, there are times when you can stick to your strategy
diligently and the price of the security does not move. This is when
patience will serve you the most. You can go back and re-examine your
strategy and look for something you may have missed, but don’t sell
impulsively. If the outlook for the security has changed, then you can
set a new price at which to sell. Alternatively, you may find that your
analysis is on track and that the security will eventually get to where
you want it to be. In that case, continue to hold your position. Many
institutional investors lose money in the market because they don’t know
how to be patient. They will make sudden decisions that limit their
ability to make a real profit. Knowing when to sell is essential. 3. Knowing yourself
The most important thing when cultivating patience is knowing yourself.
If you are aware of your tendency to be impulsive and can react
emotionally to volatility in your investment portfolio, then you can
implement certain safeguards to ensure that your temperament doesn’t get
the best of you. Zentrader mentioned that most studies done on the
behavior and results of individual investors reveal that they routinely
underperform the stock market over time. The main reason for this is
that retail investors are too focused on the short term and don’t put
enough time into forming strategies and waiting for them to materialize.
It is also important to highlight that most of us aren’t experienced
day traders. Making money with short term positions isn’t easy. The only
people who really make money from frenzied buying and selling activity
are brokers. However, long term strategies allow investors to capitalize
on the simple fact that markets appreciate over time. Institutional
investors who spend their days studying and predicting market
fluctuations may be able to play the arbitrage game, but for the retail
investor who wants to invest in the market as a hobby or as part of a
retirement plan, the best way to make money is be patient. Ultimately, like in any field, study or discipline, hard work pays
off. Many investors operate under the assumption that making money
through stock market investing is easy, but the truth is that it
requires research, analysis and patience. Zentrader also pointed out
that while it seems obvious, the best way to invest is to buy low, hold
on to securities for a long time and sell high. This is what investment
gurus like Warren Buffet advise individual investors to do.
First of all , wish you a very happy Diwali and a prosperous year ahead.I
believe many of my readers made decent return in last 1-2 years mainly
due to overall better sentiment in small and mid caps.Generally, retail
investors become active in a bull market and there is no exception this
time too. From the mails I am receiving from my readers , I feel lot of
first time investors entered in market during this period. But
unfortunately only a very small fraction of these investors are serious
about investment and remaining considering stock market as ground to
play for ‘ time pass’ . My following two cents are for this newbie
friends who always suggest me to give the name of few stocks for
Like any other profession , to succeed in
investing , lot of hard work and patience is necessary. Controlling
emotions is very important and we must ready to accept our faults and
willing to correct it. “ I am a new investor , please suggest some
stocks to me" is the common message I am getting from at least 25 % of
mails receiving in my mail box. I have only one suggestion to such
friends, before jumping into the market first of all we must realize
what kind of investor we are, based on our temperament,expectation, risk
taking capacity..etc .One stock suitable for a person may or may not
suitable for another .Another point is , ‘ a good company’( based on
balance sheet and related equations) always never means as a ‘Good
Investment’ and the entry price is very important in investing and rate
of return from it.On the other side, a bad company ( with a poor balance
sheet so far ) may turn as a wonderful investment if our entry is at
right point and things develop as per our calculation and expectation.
Of course the risk and reward in both these cases will be always
different.So , defining our own aim and selecting the way suitable for
us is most important for our investing journey. Generally we can
classify stocks into three categories ( This is my personal view and
never expect the copy book meaning for the terms used ) – Value Stocks ,
Growth Stocks and Dark Horses.
stock termed as a value stock if it trade at a lower price compared to
its known fundamentals. One common mistake lot of new investors making
while selecting value stock is their inability to assess the reason for
lower valuation and taking investment decisions based only on certain
pre-defined valuation methods like P/E ratio..etc.Personally I don’t
think a lower P/E never guarantee good return,instead to a certain
extent, it may give a cushion against sharp fall.At certain point of
time ,outdated businesses may seems attractive if we follow lower P/E
alone as a benchmark for stock selection. Such business may attractive
till date but ends in big loss in the years to come due to changing
trend, technology ..etc.
So , while selecting value stocks we
should also consider future prospects, promoter quality,dividend
distribution policy ..etc along with cheap valuation . One can expect
steady return and good dividend from such stock with less risk but
don't expect multiple times returns from such stocks in short period .
As per definition , 'Growth Stock' is
the stock of a company whose earnings are expected to grow at an
above-average rate relative to the market.These type stocks may always
look expensive based on conventional valuation parameters but remain as
expensive till their growth trajectory ends which may last for many
years .While value stocks are selected mainly based on the current
performance,growth stocks are practically selecting based on the
anticipated business growth in future and hence the later is riskier
than the former.
Dark Horses :
Please don’t search for the meaning for such stocks , you may not find it anywhere :)
These type stocks are only for daredevils but may change our fortune on
either side . Generally lesser known with poor fundamentals at present
but potential to grow multi fold over a period of time due to some
unique features like niche technology,patented products, possibility to
emerge as a winner due to changing trend of people in favor of
company’s product ..etc. Risk is very high in such stocks and any error
in calculation and assessment may wipe out entire investment in such
stocks . They are not suitable for newbies and better to avoid in the
initial stage of investment journey, at least till we gain something
from stock market itself.
So, before investing in any stock it is always better to study whether that particular stock is suitable for you considering your style of investing , even if everyone around you claim it as a wonderful one.
IL&FS ENGINEERING reported poor numbers for the quarter ended September .( Link HERE) . Though there is no meaning in finding excuses, working capital scarcity may be the key reason for slow execution . Earlier company planned to raise fresh funds but it not materialized so far . As per reports, one big corporate house is in talks to take over its parent company ( Read report HERE) . Uncertainty over possible sell out of its parent may be one reason delaying its fund raising plans.Some clarity in such issues and a revival in infrastructure sector is the need of the hour .
Two companies we are following published their September quarter
result Yesterday - SKM Egg Products Exports and V2 Retail. Result of SKM is
in line with expectation as follows .Traditionally company's business is better in second half compared with first half.
The second one is V2 Retail
which reported lower than expected result .As a notes to result company mentioned about favorable decision from CIT Kolkata in a tax dispute for Rs.116 Cr out of
Rs.167 Cr ( Company mentioned ,
IT department may opt for appeal in this matter ) .
Another issue that concerns ethical investors is how companies treat people,
especially their workers. Many ethical investors base their definition of human
rights on the UN Universal Declaration of Human Rights. The fundamental idea
behind this declaration is that all people should be treated with dignity, and
should enjoy the following freedoms and rights (to name just a few out of
Freedom of speech
Freedom from fear
Freedom from discrimination
Right to life, liberty and personal security
Freedom from slavery and freedom of movement
Freedom from torture
Right to recognition and equality before the law
Right to property ownership
Freedom of opinion and expression
Right to peaceful assembly
Freedom from compulsory association
Right to work and to choose one's employer
Right to equal pay for equal work and fair remuneration
Right to rest and leisure
Right to basic living standards sufficient to ensure
health and well-being
An ethical investor would probably
look unfavorably upon a company that made its workers feel fearful, used
discrimination, slave labor or violated any of the other freedoms and rights
listed above. Some companies might think it's necessary to rely on such tactics
to make a profit, but wiser companies know that such behavior is shortsighted
and will eventually bring the company problems.
The Business Case for Human Rights A publication called "A Guide for Integrating Human Rights into
Business Management," jointly produced by the Business Leaders Initiative
on Human Rights, the United Nations Global Compact Office and the Office of the
High Commissioner for Human Rights, instructs business managers on how to achieve
human rights objectives while also meeting the company's financial objectives.
The report identifies numerous business benefits that result from supporting
Improved stakeholder relations
Improved employee recruitment, retention and motivation
Improved risk assessment and management
Reduced risk of consumer protests
Enhanced corporate reputation and brand image
A more secure license to operate
Strengthened shareholder confidence
More sustainable business relationships with
governments, business partners, trade unions, sub-contractors and
Indirect Human Rights Violations The same publication points out that
a company can have an important role in human rights violations even if it
doesn't commit them directly. If the company is aware that an entity it works
with (like a supplier, subcontractor or government agency) abuses human rights,
the company is complicit in the abuse if it allows, encourages, tolerates or
ignores that entity's behavior.
The report outlines four primary ways a company can indirectly participate in
human rights violations:
1. The company provides a government with products, services or information
that it knows will be used abusively.
2. The company knows that a government it is working with is likely to commit human
rights violations in order to execute an agreement.
3. The company benefits from violations committed by others.
4. The company is aware of ongoing rights violations but remains silent.
Businesses can assess their
strengths and weaknesses regarding human rights, and choose to eliminate their
weaknesses. A company that violates human rights subjects itself to numerous
Major Areas of Concern Here are a few common areas a company should be concerned with when
considering its approach to human rights.
Health and Safety in Working Conditions An employee's working conditions will have a major impact on their quality
of life, health and longevity. Dangerous working conditions include those that
are unsanitary, noisy, have high temperatures, aren't adequately ventilated,
have insufficient lighting, involve dangerous chemicals, are in confined
spaces, demand physical labor that exceeds the employee's capabilities and
entail physical or psychological abuse from other employees or managers.
Employees should also have sufficient break time and access to bathrooms, and
should have the physical freedom to leave the job site.
Ethical investors should know that unsafe working conditions don't just happen
in other countries. In the United States, for example, a 2009 article from
"Gourmet" magazine reported that tomato pickers in Florida were being
held as slaves, forced to live in cramped quarters without a toilet or running
water, deprived of their paychecks, refused time off when ill and physically
abused. In twelve years, more than 1,000 captive workers had been freed, and
more were likely undiscovered.
Health and Safety for the Surrounding Community
The health and safety of the
surrounding community will be a bigger issue for some businesses than others. A
retail store might not have much to worry about at its actual store, but
further up the supply chain, the companies that manufacture the goods sold in
the retail store might have to be concerned with their use and disposal of
chemicals, for example. Agricultural operations, meanwhile, must consider the
impact of fertilizers and pesticides.
Wages and Benefits
Investors have a wide range of
beliefs about what wages and benefits companies should provide to their
employees. Some advocate a "living wage" that pays workers enough to
live comfortably in the same communities where they work. Some believe that the
federally mandated minimum wage is sufficient. Still, others believe companies
should be allowed to pay anything, and workers should be allowed to accept jobs
at any wage, even if that pay rate is below minimum wage. Some investors are
concerned about the disparity between what the company's entry-level workers
earn, and what its executives earn.
Some ethical investors want to see companies offer employees a wide range of
benefits. The most basic benefits are health insurance, paid sick leave, paid
holidays, paid vacation and retirement benefits. Other benefits, a company
might offer, include life insurance, disability insurance, stock options, an
employee stock purchase plan, training and advancement programs, tuition
reimbursement and flexible work hours.
Chances are you can find a company to invest in that treats its workers the way
you think they should be treated. One good source of information on companies,
that treat their employees well, is annual surveys of best places to work.
Finding out where employees are most satisfied, and why, can help guide
Almost as important as knowing which companies are good choices, is knowing
which companies to avoid. Watchdog organizations such as the Institute for
Global Labour & Human Rights can help investors weed out companies whose
treatment of workers seems unacceptable.
Corporate governance looks at how
companies manage themselves and their relationships with shareholders and
stakeholders. Ethical investors want to make sure that corporations are being
honest and transparent, and that management isn't looking out for its own
interests to the detriment of others.
Investors who want help analyzing a company's governance can turn to a number
Standard & Poor's GAMMA score (GAMMA stands for
governance, accountability, management, metrics and analysis) evaluates
the governance of companies in emerging markets, according to shareholder
influence, shareholder rights, transparency and board effectiveness.
Institutional Shareholder Services (ISS) has an
executive compensation database, and its Governance Risk Indicators
measure companies' governance performance on audit, board,
compensation/remuneration and shareholder rights issues.
The Investor Responsibility Research Center Institute
funds corporate governance research, and makes it widely available to the
public. For example, it published a report in July 2010 called
"Compensation Peer Groups at Companies with High Pay" that
examined a number of S&P 500 companies whose executive compensation
was out of line with the executives' performance, and the compensation
provided by similar companies.
Governance Metrics International (GMI) develops risk
ratings and research related to companies' environmental, social,
governance and accounting practices. It examines all the companies in the
MCSI world index, the DJ STOXX 600 and the S&P 1500, and updates its
Glass, Lewis & Co. helps investors evaluate the
risk of investing in a company as it pertains to governance, business,
legal, political and accounting issues. It also provides proxy research
and voting recommendations.
Areas of Concern
Let's examine the major corporate governance issues that concern ethical
Accounting Many corporate governance issues have to do with accounting. Is the company
honest and accurate in its accounting methods and disclosures? Has the company
faced any regulatory sanctions, and if so, has it corrected the problems that
got it into trouble?
No investor wants to hold shares of a company that commits accounting fraud, or
is sloppy in its accounting practices. According to ISS, investors should be
concerned if an auditor issues an adverse opinion, if the company has to
restate its financials or if the company has been subject to enforcement
action. Investors should also look out for the financial expertise of the audit
committee and for weaknesses in internal controls.
Investor Relations Investors are part-owners and have a financial stake in how well the
company performs - perhaps not as large of a stake as the company's employees
and managers, but an important stake nonetheless. Therefore, they should care
how the companies they invest in treat their shareholders.
Some companies issue different classes of stock that have different voting
rights, and investors in the lesser classes have fewer voting rights. In other
companies, one share equals one vote. Other voting issues include whether all
common shareholders have a say in the election of all board members; how the
board handles popular shareholder resolutions; whether shareholders have a say
in approving or denying proposed mergers, acquisitions and restructurings and
whether the company has a poison pill policy. Investors want to see policies in
their favor - for example, being able to vote on a proposed stock incentive
plan, since too many stock options create the potential for significant share dilution.
Executive Compensation Shareholders may want to see executive pay tied to stock performance. If
the stock performs well, executives earn more; if it doesn't, they earn less.
However, even if executive pay is not formally linked to performance, an underperforming
CEO can be ousted in a takeover.
Some ethical investors want to limit CEO pay, to a multiple of what the
company's lower-paid workers earn, but such limitations on pay may not be in
the company's best interest. CEOs who are highly paid are more likely to remain
with a company, and as long as they are performing well, stability can be good
for the stock. Under the Dodd-Frank Act, companies must allow shareholders a
nonbinding vote on executive compensation packages, and publish the results in
their regulatory filings.
It matters who sits on the board of
directors, how they manage their responsibilities and what other associations
they have. Board members should attend at least 75% of meetings. If they sit on
more than one board, they should have enough time to meet all of their
obligations, and their positions should not create conflicts of interest.
Ethical investors may prefer that a high percentage of the board's directors be
independent; if they are not executives or otherwise affiliated with the
company, they may be better able to guide the company toward choices that are
best for shareholders. A CEO who is also chairman of the board creates a
conflict of interest.
Regulatory Compliance When it comes to regulations like Sarbanes-Oxley and the plethora of other
Securities and Exchange Commission rules that affect companies, how does the
company you want to invest in measure up? Regulatory non-compliance might pay
off in the short term, but in the long run, it's likely to be detected and
Political Contributions Sometimes companies make
contributions to political candidates with the implicit understanding or
expectation that if that person is elected, the company will receive some sort
of special treatment from the government. Other times, companies make political
contributions in an attempt to dissuade politicians from passing new
regulations that would threaten their businesses. Ethical investors may not
want to be affiliated with a company that engages in crony capitalism.
Illegal Behavior A company that engages in illegal behavior puts all of its shareholders and
stakeholders at risk. Types of illegal behavior that companies might engage in
are insider trading, kickbacks and bribery. Sometimes it can be difficult to
evaluate how problematic these practices are, because practices that are highly
frowned upon in the United States, like bribery, may be essential to conducting
business in foreign countries.
Governance as a Practical Matter Corporate governance, like other matters in ethical investing, is not just
a feel-good issue. It's a significant factor in determining the company's
bottom line and its long-term viability.
In the next section, we'll look at how investors can take action to get
publicly traded companies to change their behavior.
Investor Activism and Shareholder
For some people, buying stocks in
companies, whose actions they support, isn't enough. Activist investors seek to
directly change the practices of targeted companies. As Amy Domini, founder and
CEO of Domini Funds, states, "Socially responsible investing is not only a
way to align your investments with your values - it is also a way to make
corporations behave more responsibly." Here are the methods activist
investors commonly use.
Proxies allow shareholders who cannot attend annual, or special, meetings to
vote on the same issues that shareholders who do attend the meeting will vote
on. Either electronically or by mail, shareholders cast their proxy ballots to
make their opinions known. Typically, for every share an investor owns, he or
she gets one vote. If a shareholder owns a stock class with special voting
rights, he or she will get multiple votes per share.
Many investors toss out their proxy ballots because they are too busy to research
the issues up for vote, and make an informed decision. Their abstention reduces
the total number of ballots cast. For ethical investors, however, voting is an
opportunity to be heard, and possibly to create change.
How do ethical investors know which way to vote on the issues? Often, they look
to more experienced investors for guidance. For example, institutional
investors might publish proxy voting guidelines on their websites, explaining
how they chose to vote and why. Investors can decide to vote with the
institution or against it, depending on whether they agree with the
institution's position or not.
Institutional investors can have a great deal of influence on the outcome of
elections, because their large size allows them to own large numbers of shares.
Therefore, it may take a consolidated effort from large numbers of small-time
investors to influence a vote's outcome. Ethical investors are most likely to
have an impact if they join a coalition of like-minded investors.
Socially responsible mutual funds' published proxy voting policies are also a
good source of information for individual shareholders. For example, the
"Calvert Family of Funds' 2010 Global Proxy Voting Guidelines" states
that Calvert espouses the following positions:
The Fund advisor will oppose non-independent directors
candidates nominated to the audit, compensation and/or nominating
The Fund advisor will oppose executive compensation
proposals if we determine that the compensation does not reflect the
financial, economic and social circumstances of the company (i.e., during
times of financial strains or underperformance).
The Fund advisor will ordinarily support proposals
requesting that companies avoid exploitative labor practices, including
child labor and forced labor.
Shareholder Resolutions To take things a step further, some
investors introduce their own issues to vote on. These are called shareholder
resolutions, and in order to propose one, you must have a meaningful stake in
the company. The SEC defines this stake as 1% of all outstanding shares, or
$2,000 worth of shares, held for at least one year prior to the resolution
The resolution itself must follow
specific guidelines in order to be accepted (e.g., it can't be longer than 500
words). Also, the person or group (or their representative) who files the
resolution, must attend the meeting to present the resolution. Companies don't
have to accept resolutions, and even if they receive a majority vote, they
don't have to implement them. However, shareholder resolutions give investors a
chance to present their ideas to companies and to other shareholders. Also,
shareholder resolutions may garner media attention that can pressure companies
to make changes.
What kinds of changes do shareholder resolutions seek? Some ask corporations to
disclose information about their impact on the environment. Others ask
corporations to make a specific change, such as taking an action that would
decrease the company's waste production. Shareholder resolutions allow
investors to influence company policies, and bring to their attention to
issues, that, if not addressed, could adversely affect shareholder value.
Electing New Directors Ethical investors can try to get board members, whose views they disagree
with, replaced by board members whose views they do agree with. The policies
for nominating directors vary by company, but can be found in the company's
proxy statement. However, a company may not even look at a nomination from an
unknown shareholder, let alone take it seriously. Companies already have
established procedures for locating prospective board members.
In recent years, activist investors have pushed for open nomination policies to
get their suggestions put on the proxy ballot. Such a policy would publicize
nominations and put them to a vote. However, in July 2011, the U.S. Court of
Appeals ruled against a proposed SEC rule that would have allowed shareholders,
owning at least 3% of outstanding shares for at least three years, to put their
nominees on the proxy ballot.
Divestment A single individual selling a few shares of a company to protest its
practices is unlikely to have any effect. Getting a significant percentage of
shareholders to do so, however, may put enough pressure on a company to
convince it to change. To succeed in this strategy, it is usually necessary to
win over institutional investors.
Divestment is considered a last resort, after other methods of shareholder
advocacy have failed, and it is usually only used in extreme cases. The most
famous example is that American students in the late 1980s convinced some
universities, whose large endowments classified them as institutional
investors, to sell their shares in companies tied to South African apartheid.
Other large investors, including some city, county and state governments,
followed suit. It's difficult to say whether divestment created enough economic
pressure to force South Africa's rulers to change their ways, but it certainly
brought increased attention to the human rights abuses occurring in the
How To Research Ethical Investments
Researching ethical investments
means examining both company ethics and investment performance. Let's start
Perusing Corporate Websites
It seems like every corporate website, these days, has a section on
sustainability. But can you believe what you read? When are a company's
practices truly sustainable, and when is the promotion of sustainability just a
public relations strategy? Let's examine how you can get to the truth.
If you want to invest in individual stocks, company websites aren't a bad place
to start your research. Publicly traded companies generally have two websites -
a consumer-focused website and an investor-focused website. The
investor-oriented site is where you'll most likely find the information you
Here are some examples of the types of information you're likely to find:
Community Impact Walmart states, "we
believe in a philosophy of operating globally and giving back locally. . .
. [we help] to provide financial and volunteer support to more than
100,000 charitable and community-focused organizations."
Commitment to Workers Google states, "We provide
a standard package of fringe benefits, but on top of that are first-class
dining facilities, gyms, laundry rooms, massage rooms, haircuts,
carwashes, dry cleaning, commuting buses - just about anything a
hardworking employee might want."
Environmental Responsibility Clorox states, "The Clorox
Company is committed to minimizing hazardous waste in its facilities. We
ensure that any waste that is generated is properly handled by approved
vendors and that it is properly tracked throughout the process."
Human Rights Gap states, "Gap Inc.
seeks to ensure that the people working at various points along the supply
chain are treated with fairness, dignity and respect - an aspiration that
is born out of the belief that each life is of equal value, whether the
person is sitting behind a sewing machine at a factory that produces
clothes for Gap Inc., working at one of our stores, or wearing a pair of
Be cautiously optimistic, though: companies know that by
promoting the ways that they protect the environment, benefit the communities
where they operate and more, they may attract increased numbers of customers
and command higher prices for their products. So it's safe to assume that if a
company has any ethical practices, whatsoever, it will promote them on their
website. Unfortunately, it's also true that companies that aren't particularly
ethical sometimes cover up, or stretch, the truth to promote a positive image
of themselves. That's why you shouldn't rely, entirely, on what a company says
about itself on its website - you should verify the information with reliable
third parties. For example, look for news articles on the company's activities,
and make sure that the articles haven't just relied on the company's own press
releases and internal data as sources.
Screening Tools There are also websites and companies that will help you screen for
socially responsible investments. They've done the hard work for you and can
save you some time. Here are some examples.
The American Customer Satisfaction Index (ACSI) is not
specifically geared toward socially responsible investors, but it's a
useful tool for locating companies that customers are happy with and,
that, consequently, are probably doing well financially. The ACSI evaluates
more than 225 companies in 47 household consumer industries, looking at
customer expectations, perceived value, perceived quality, customer
complaints and customer loyalty to determine how satisfied customers are
with a company.
The Social Funds website's Corporate Research Center
lets users search for companies by name to find independently produced
social responsibility profiles of those companies. For example, the site
will help you locate a report on Amazon produced by Calvert (a socially
responsible investment company). Site visitors will also find recent news
related to sustainable investing.
The Global Reporting Initiative (GRI) website gathers
corporations' own corporate social responsibility reports. GRI developed a
sustainability reporting framework to guide companies on the issues the
public may want to know about, such as the monetary value of any
environmental fines a company has paid, the number of company contracts
that have undergone human rights screening and the percentage of employees
covered by collective bargaining agreements.
You can also use the list of companies that make up a
socially responsible mutual fund, or ETF, as a starting point to select
f you're looking for socially responsible mutual funds, a number of screening
tools will help you find the right fund to achieve your goals. Exclusionary
screens weed out companies, and funds, which invest in things you don't like,
while inclusionary screens find companies, and funds, that invest in causes you
Calvert's Know What You Own service lets users look up
any mutual fund (not just Calvert funds), choose an issue that's important
to them and then see which companies in that fund (if any) do not meet
The Calvert Social Index starts with the 1,000 largest
companies in the United States by market capitalization, and narrows down
the list by evaluating each company's performance in the areas of
government and ethics, environment, workplace, product safety and impact,
community relations, internal operations and human rights and indigenous
people's rights. The company also offers a number of other stock, bond and
money market funds that are more tightly focused on specific social goals
or financial goals.
The Forum for Sustainable and Responsible Investment
helps individual investors compare socially responsible mutual funds by
cost, performance, screens and voting records. "Bloomberg"
provides the financial performance data. Users can graphically see whether
a fund excludes investments in certain categories (such as
defense/weapons), seeks investments with a positive impact in certain
categories (such as labor relations) or seeks to avoid poor performers in
certain areas (such as human rights).
you've determined that a company meets your ethical criteria, it's time to see
if it meets your financial criteria (you could also do these steps in reverse
order - start with whichever one is easier for you). You can use the same
methods traditional investors do, to evaluate an investment's financial
performance, such as annual reports, prospectuses etc.
Benefits And Drawbacks Of Ethical
There are many reasons to pursue
ethical investing - and many reasons why people avoid it. Here, we take a
closer look at their motivations.
The Feel-Good Factor
Ethical investing certainly has a large emotional component. People who choose
to follow an ethical investing strategy let their feelings, about how workers
should be treated, how the natural environment should be cared for, how
corporations should treat their shareholders and so on drive their investment
decisions. One of the benefits of this style of investing, is the potential for
good feelings when a company, whose actions you support, performs well
financially, bringing good returns to your portfolio, and benefits to all of
The downside of this emotional component is that if a company violates one of
the principles you thought it stood for, can bring massive feelings of
disappointment. The same thing can happen if the company's principled stance
fails to bring good financial returns, or even brings financial losses.
Compounding the Effects of Everyday Choices If you already live your life in strict accordance with a particular belief
system, ethical investing is a logical addition to that system. The decisions
that large corporations make have a much bigger impact than the decisions that
one person makes, after all. It doesn't make a lot of sense to ride your bike
everywhere, and only use canvas bags for your groceries while holding shares in
a company with a poor environmental record. Of course, if you're an average
investor with a few shares, or even a couple hundred shares, you're too small
to have much influence on a company, but you'll probably sleep better at night
knowing that your investment choices are aligned with your living principles.
Deciding Where to Draw the Line It can be difficult to find investments that perfectly meet your criteria,
which means that you have to decide what's most important for you and where, if
anywhere, you're willing to compromise. What if 5% of a company's operations
involve something you don't approve of, and the other 95% in something you do?
Do you invest? What if you like a particular company, but you don't like its
parent? What if you invest in a company you support, and then it gets purchased
by a company you hate? If you have to choose a lesser evil, why invest at all?
What about socially neutral investments - do they have a place in your
portfolio? You have to overcome difficult decisions, like these, if you want to
be an ethical investor. Not investing isn't an option if you want to be
Forgoing High Returns from
Investments that Don't Meet Your Criteria When you screen out investments that
don't meet your environmental, social or governance criteria, you'll inevitably
be screening out some high performers. You won't necessarily earn lower returns
by pursuing an ethical investing strategy, but it will take more work to track
down the right investments.
Expending Time and Effort Socially responsible investing is not a passive strategy. It takes a lot of
time and effort to track down and review all the research you'll need to make
your decisions - more time and effort than it would take if you were solely
focused on financial performance. Once you've found investments you like, you
have to keep tabs on them to make sure they meet the ethical and financial
goals you expect them to. Sometimes you'll have to sell investments that fall
short and find new ones to replace them. If it all sounds like so much work
that you feel totally discouraged from investing at all, you might want to
invest conventionally and commit to donating a percentage of your profits to
Overcoming High Fees If you choose to invest in socially responsible mutual funds, you might
have to overcome higher expenses than you would as a conventional investor.
Essentially, what you're paying for is to have someone do all the difficult
research on ethical and financial performance for you. If you're busy and if
you trust the mutual fund company, this price may well be worth it. But high
expenses can really drag down your returns, especially over the long run. Will
you still be able to meet your financial goals if you're paying expenses of
1.2% annually instead of 0.2%?
Going Against the Tide
Socially responsible investing is still a small part of the overall market. The
majority of investors don't decide what to buy or sell based on the same
criteria that socially responsible investors use. Lots of investors don't give
much thought about what they invest in - they just choose the options that their
401(k) manager recommends given their anticipated retirement date, or they pick
an S&P 500 index fund and forget about it. Once again, you'll have to work
harder to find the news and information you'll need to make your investing
decisions - you may not be able to find it in conventional financial reporting