Saturday, December 19, 2015

Retracement Or Reversal: Know The Difference

Courtesy : Investopedia

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:
Factor Retracement Reversal
Volume Profit taking by retail traders (small block trades) Institutional selling (large block trades)
Money Flow Buying interest during decline Very little buying interest
Chart Patterns Few, if any, reversal patterns - usually limited to candles Several reversal patterns - usually chart patterns (double top, etc.)
Short Interest* No change in short interest Increasing short interest
Time Frame Short-term reversal, lasting no longer than one to two weeks Long-term reversal, lasting longer than a couple of weeks
Fundamentals No change in fundamentals Change or speculation of change in fundamentals
Recent Activity Usually occurs right after large gains Can happen at any time, even during otherwise regular trading

Sunday, December 13, 2015

Agriculture ministry set to control cotton seed prices....

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 affordable prices".
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 spokesperson.  ..
"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.

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 affordable prices".

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 affordable prices".

Saturday, December 12, 2015

Common Clues Of Financial Statement Manipulation

Courtesy : Investopedia

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 corporate write-downs 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.


Although 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.

Saturday, November 28, 2015

The 10 Commandments Of Investing

Courtesy : Investopedia

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.

There 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 all-or-nothing game. 

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.

Saturday, November 21, 2015

Three reasons patience is essential for stock market investing

 Courtesy :

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.

Saturday, November 14, 2015


NCL INDUSTRIES Declared its second quarter and half year result as follows .

Link to latest interview with MD of NCL   HERE

Wednesday, November 11, 2015


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 investment.

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.

Value Stocks 

Generally a 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 .

Growth Stocks

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. 


Once again ,Diwali wishes to all my readers .

Saturday, October 31, 2015


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.

Result Link HERE

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 ) .

Link To Result HERE

Tuesday, October 27, 2015

Saturday, October 24, 2015

Ethical Investing - Part 2

Workers' Rights and Human Rights

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 several dozen):
  • 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 human rights:
  • 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 suppliers
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 risks.

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 investment decisions.

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

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.
Research Assistance
Investors who want help analyzing a company's governance can turn to a number of resources:
  • 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 data monthly.
  • 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 investors.

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 penalized.
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 Advocacy

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 committees.
  • 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 submission deadline.
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.

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 country.

How To Research Ethical Investments


Researching ethical investments means examining both company ethics and investment performance. Let's start with ethics.
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 seek.

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 our jeans."
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 individual stocks.

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 support.
  • 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 their criteria.
  • 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).
Once 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 Investing
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 its stakeholders.

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 financially successful.
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 charity.

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 sources.

Courtesy : Investopedia


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