Satyam

Well...what a day for Satyam...It turns out that the management has done a turn around and have called off the deal. I am not getting into the details of the deal. Its all in here. Couple of things we, as investors, can take away from this:

1) Satyam is a big 4 IT company and had a good reputation (at least till yesterday). With only around 8% shares held by the promoter, he could manage the board to rubber stamp on his decision. Imagine the other Indian companies where promoters hold far higher stakes.

2) In this case, because institutional investors had around 67% shares, they could voice off their anger and hostility. As a retail investor, once can't hope for something similar to happen for other small and mid-cap companies.

3) Value investors who sometimes use cash in the business as a cushion for valuation will find situations like these toppling all their calculations. The conventional worry, in any case, is that the management might go for unrelated diversification and piss away the cash. Satyam's example is the extreme end of this - diversification benefiting the promoters only.

4) I am a fan of Buffett etc and believe that when situations arise one can concentrate their investments. But what about management credibility? It is probably the most important single unpredictable and uncontrollable variable. That is why when one is doing cheap stock investing based on cash and other assets, one has to do a decent amount of diversification. Joel Greenblatt in his magic formula clearly advocates picking 20 stocks.

5) The need for local understanding is critical. Most of what we read about investing is in books related to the US markets. US markets are of course much different than Indian markets in many ways. One has to be a little street smart-ish and know how promoters act in our conditions. And how little support there is for minority investors.