I tried to create an analogy between Finance and Political situation in one of the Indian states to understand how decision making is biased based on emotions and top of mind awareness of a person.
If you are a risk-averse investor who understands finance and you would like to take an investment decision among 3 alternatives in a certain industry provided the only 3 options you have.
After validating them through the data provided below, he is expected to select the best 1.
Option 1 (Company A): This company had a very good historical track record, performance and return during the 1995-2004 period because of a Visionary leader and his innovative diversification activities. It lost the market leader position in 2004 and retained it in 2014. Still, the last 5 years was extremely disappointing for investors and stakeholders as the returns were below par and none of the planned activities were materialized as promised by the board. Off late, because of succession planning, there is a news that the new leader will be the son of the Chairperson of the company, and the credentials of the probable candidate are not worth rewarding the position. He has neither got the experience nor the personality and the attitude to take care of the responsibilities. This is creating pressure on the stock performance of the company.
Option 2 (Company B): This particular company underwent a Spinoff process and new company got established in 2011. The parent company has got great brand value, image, and trust in the market.Because of the parent company, this company is very close to the market leader in terms of market share and investor preference. But, the spun-off company is being under consideration for Earnings Manipulation over the last 6-7 years. Although nothing was found guilt till date, it gave a negative signal about the company to a few stakeholders and the market. The CEO of the company is being cornered most of the times for the allegations filed against his actions to manipulate the earnings which question the credibility of their Ethics. On the other side, few trustable valuation agencies predicted that there are high chances for their stock to do well in the near future. Leaving aside the earnings manipulation allegation, no other reason is there to avoid investing in this company.
Option 3 (Company C): This is a penny stock. No history, no track record, no proper product portfolio, and limited target market. But the Founder of this company is a gem of a kind. He is well known for his gutsy character and decision marking skills. He was the Director of a market leading firm in some different industry altogether with 0 correlation with the one he established. He believes that there is a huge market gap in the industry and his focus is to bring a change in the industry demographics. Few believe that under the leadership, there is a possibility for very high returns but with high uncertainty.
The investor currently holds equity in company A. He is in dilemma to take an investment decision(long term- minimum 5 years). What can be the best bet for his savings?
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