Up front let me state you're unlikely to be an investor in individual stocks and over a life time of investing never invest in what turns out to be a fraud. So far I have been lucky in that my only fraud was way back in the mid 90's (I can't even remember the name of the company) when the CEO suddenly rushed off to Australia and my loss was fairly modest (as I was poor), albeit I did make the horrid mistake of doubling up when the price had halved.
Back to Steinhoff, the PWC report is finally out. Three thousand pages and four thousand attachments, albeit we only got a ten page summary that detailed over R100billion in fraud over the 2009-2017 period. Profits for this period were only some R60billion and while the fraud number may include some double counting, it basically means Steinhoff (JSE code: SNH) was a ponzi from day one.
So how do we avoid being suckered into a ponzi scheme?
So what next? Well Steinhoff is bust, 100% bust. Sue they have some assets (such as c70% in Pepkor and Conforama and bankrupt Mattress Firm in the US) but the claims against the company are in excess of R200billion and current shareholders are last in line. The process will take a while, maybe a decade, and by the end there is nothing left for shareholders. If you're holding or buying Steinhoff, understand you're trading because you can't invest in a share that's going to zero.
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We live in wild times made possible by the internet and powerful computers in our pockets. Much of it is good with a fair amount of bad as well (think Twitter trolls), but for large old school companies it can be especially bad.
Firstly those rules are a lot more ethical. Consumers want to be treated fairly. Hey we always did, but we never really had any power. And that's the second and very important point, consumers now have power. That power comes via the Internet and very quickly a raging anger can over whelm any attempt to manage the message. Now sure often the raging anger is actually just a lynch mob and this is very much the dark downside of the Internet. But the upside is that consumers have power and they'll exercise that power. Sometimes for good and sometimes for bad.
A business needs to understand this. I remember attending a presentation on generational theory a decade back where the message was that millennials wanted ethical companies and would pay more to these companies. The flip is that they'll boycott a business they consider to be unethical. Now this is way more than just millennials, the issue is that millennials were given the power to firstly know a companies ethics and secondly do something about it.
Companies that are going to survive and thrive in this new world will have fairness and ethics at their core, and that's hard. It's easy to put that into a mission statement, but living it is something else entirely and often a company messes up. For example the news that a company will phase out plastic straws by 2022. Nice, but why so long? Simple because they're trying to protect profits. Fair enough but the ethical demanding consumer doesn't care about your corporate greed, they care about the planet.
The even harder issue is how do we manage this as an investor? Truth is we need a crisis to see how a business manages it and that is late in the process. But we can see glimmers of it via other means, such as the plastic straw example mentioned earlier. If a company is not putting the customer and ethics front and center they will eventually be in trouble.
Lastly as investor we need to not chase profits at any cost. We need to invest ethically as well, this means fair fees we're charged by providers. It also means exiting dodge companies even if we think there is money to be made. We also need to focus on ESG (environmental, social and governance) issues.
A very last point. Will Boeing survive? Of course. Will this hurt? Absolutely. Will it be a great investment going forward? No chance.
JSE – The JSE is a registered trademark of the JSE Limited.
JSEDirect is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.