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Stock Investing--Never Invest Your Money in a Company with Untrustworthy Management

dave.

dave.vanknapp@sensiblestocks.com.

Best regards

David Van Knapp
http://www.SensibleStocks.com

Stock Investing--Never Invest Your Money in a Company with Untrustworthy Management
This news item, dated February 26, 2007, caught my eye:

"AES announced Monday that it plans to reschedule the
release of its fourth-quarter and full-year results because
of errors in its financial statements. AES had similar
problems last year, when the company admitted material
weaknesses in its accounting systems, particularly in its
foreign operations. The company expects, as before, to
restate its financial results. The company also announced
that may have a stock-option dating issue."

In rating a company's quality--the very first step in
deciding whether it is even a candidate for your investment
dollars--management trustworthiness is a mandatory litmus
test.

The Sensible Stock investor seeks unquestionable integrity
of management. Here are examples of situations that should
stick a big red flag on any company:

? Companies being sued on antitrust grounds.

? Companies that produce unsafe or harmful products and
attempt to deny or evade responsibility.

? Companies that admit lying or misleading the investing
public in any way.

? Companies whose reported financials are questioned, or
which have a reputation for "aggressive accounting."

AES falls into the last category. First, it can't seem to
get a handle on its own numbers. For two years in a row, it
has had to delay or restate its financial results. In my
book, that makes them "untrustworthy." I don't mean this in
a personal way. They may all be good, honest guys there at
AES. They may simply be incompetent. Their intent (whether
to be honest or misleading) is not the issue. The real
issue is, can you trust their numbers? Clearly you cannot.

If I were evaluating this company for possible investment,
I'd save myself some time and toss it out as soon as I ran
across this news item.

Note also that AES has a potential second problem: It may
have a stock option back-dating issue. The admission of
these issues--which are sometimes innocent but are often
outright fraud--has become almost epidemic over the last
year or so. Because the practice was so widespread, perhaps
it shouldn't be considered a trustworthiness issue.

But then again, not every company that issues stock options
backdated them. Backdating options, after all, moves money
out of shareholders' pockets and into the pockets of
management or board members. It is lying to shareholders.
If management lies about that, what other subjects might
they be misleading you on? New products? New markets?
Operational improvements? How can you know?

With what kind of company would you rather place your bet?
A company which effectively cheats its owners out of some
of the profits to which they are entitled, or one that
doesn't, keeping its owners' interests foremost. The
question answers itself.

Some indicia of untrustworthiness are easily seen in public
records. Has the company had a formal SEC investigation in
the past year or two? Has it repeatedly taken "one-time"
charges year in and year out? Has it recently restated
earnings? Has its CEO or CFO resigned under questionable
circumstances?

Depending on your point of view, an entire spectrum of
factors can lead you to question a company's integrity. For
example, Microsoft has been adjudged in court decisions to
have used illegal tactics for years to preserve its
monopoly in PC operating systems. Years after the issue
first came to light, it is still fighting these charges in
Europe. You may consider this proof of a lack of integrity
and refuse to invest in Microsoft for this reason alone.

For another example, consider Daimler-Chrysler: At the time
of the "merger" of Chrysler and Daimler-Benz, Jurgen
Shrempp (CEO) said that there would be equality of the
companies after the merger. Shrempp later retracted these
statements, publicly acknowledged that he had misled, and
appointed a German to head Chrysler. Many of Chrysler's
executives left the company as the truth of the situation
emerged.

So did a lot of investors: From early 1999 to early 2001,
the stock dropped 50 percent. Now, in 2007, Chrysler is for
sale. As Dr. Phil might ask, "So, how has that worked out
for you?" Evidence of lack of integrity was there from
practically the beginning.

Back to AES. Questions abound: Will AES ever be able to get
a handle on its accounting? Can any of its reported numbers
be relied upon? Has the company committed intentional fraud
with its options practices? Does anybody there know what
they are doing? Does AES' board have a clue?

With questions like these, why would anybody entrust their
hard-earned money to buying AES stock? The Sensible Stock
Investor certainly should not.

----------------------------------------------------
Dave Van Knapp is the author of "Sensible Stock Investing:
How to Pick, Value, and Manage Stocks."
Learn more about his step-by-step approach for individual
investors at http://www.SensibleStocks.com . Or go directly
to Amazon.com, where the book has a perfect 5-star reader
rating:
http://www.amazon.com/gp/product/059539342X/sr=1-1/qid=11553
81420/ref=sr_1_1/002-5852738-5260830?ie=UTF8&s=books .

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