Usually when companies see an initiating coverage report on themselves, it is good news. But not when you see this: Initiating Coverage on Olam International – Strong Sell.
Carson Block of Muddy Waters triggered a sell on Olam shares, listed in Singapore, when he made bold calls on Olam’s business practices. The media takes him seriously because he has had significant success in making short calls on seemingly healthy counters.
Prior to the release of his research, Olam made a law suit against Carson. With so much negative publicity, the damage is already done. We all know investors are risk averse and risk premiums have inevitably increased. We looked through the research report and it goes into detail highlighting accounting ambiguities amidst Olam’s high leverage – these of course are for Olam to confirm or deny.
The finance industry is webbed with conflicts of interest. Management pays auditors to conduct audits, management pays bankers to do capital raising, even research analysts very often develop a relationship with management as well. Who’s opinion can we trust?
In a sense we should be thankful for “corporate policemen” such as Muddy Waters for picking on companies that raise doubts. If they make the right accusations, shareholders will have to thank them for surfacing the truth. If they make the wrong calls, target companies will recover sooner or later. So from the perspective of shareholders and debt holders, it is a win-win.
On the other hand, Muddy waters can make a possible huge profit if correct, and suffer a certain huge damage if wrong. Carson is putting his head on the block for Olam shareholders. Maybe he deserves a medal?
It is not very often we see investors make a sell trade so bold so publicly. It is daring and keeps publicly traded companies on their toes. There is so much that goes on in business management which retail investors do not know, or do not have the time to know about. After all, Muddy Waters hired professionals to conduct research for 3 months full time – how many of us retail investors have that much time and resource?
Exercise care when picking stocks and diversify if you need to. You may think that you will be compensated for the risks you know about, but don’t forget to add a slight premium for the risk you do not know or have not thought about!