Value Traps and Economic Ignorance A financial analyst is often, or at least should be, more of a psychologist than a financial expert. There are companies that I knew fifteen years ago that had inherent value a multiple of what their stocks were trading at. Today, there continues to be similar upside, except that upside targets and share prices are lower. What went wrong? A problem reaches the far North faster than climate change can melt all the ice. [PT] Such companies are often value-traps. A financially astute person might invest in them, hoping that eventually, the market will recognize the value. Unfortunately, some managements do not understand the concept of value-creation or are unfocused, innumerate, or crooked. One must
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Value Traps and Economic Ignorance
A financial analyst is often, or at least should be, more of a psychologist than a financial expert. There are companies that I knew fifteen years ago that had inherent value a multiple of what their stocks were trading at. Today, there continues to be similar upside, except that upside targets and share prices are lower. What went wrong?
A problem reaches the far North faster than climate change can melt all the ice. [PT]
Such companies are often value-traps. A financially astute person might invest in them, hoping that eventually, the market will recognize the value. Unfortunately, some managements do not understand the concept of value-creation or are unfocused, innumerate, or crooked. One must learn early that even in the private sector, top leadership positions do not necessarily end up in the hands of the most competent people.
I mostly analyze mining companies. An example of a value-trap is a Hong Kong-listed entity, G-Resources, which was a mining company in the past. Today, it has most of its value is in treasuries and cash, worth US$1,500 million. Its market capitalization (at a HK$0.05 share price) is, however, a mere US$200 million. I don’t see any hope of it ever going up to match its inherent value.
An analyst must screen out the bad apples as quickly as possible. I want to address some areas in which companies actively destroy value.
Many mining companies, whose focus should be geology and mining engineering, spend too much time worrying about the commodity market. The commodity business is a specialization in its own right, and there is a reason why commodities are called “commodities”: It is hard — perhaps impossible — to project their future prices.
When mining companies project a future of scarcity, they show a lack of understanding of economics: About the elasticity of demand and supply and how futures and options markets take care of shortages through a complex web of hedging by suppliers and users. The extent to which a specific commodity can rise in price is limited, because at some point substitution kicks in.
Holier than Thou with ESG
Over the last couple of years, many companies have implemented ESG programs. And EDI, a recent advent, has gone into hyper-drive. Of course, only the acronyms are quoted, for every “woke” person should know what they mean. ESG stands for Environment, Social, and Government.
No one cares to explain how ESG is different from the need to follow legitimate laws. It has become a checklist, devoid of the spirit of ethical conduct, a way to earn brownie points by acting holier than thou.
ESG policies have institutionalized corruption, with NGOs, which should be working for the welfare of locals, taking fat checks from companies. ESG has encouraged locals to become whiners and has created space for crooked local leaders to emerge, with NGOs as mediators. ESG has become a vicious cycle of entitlements, grievances, corruption and dependence.
It is not the job of mining companies to do social work, for which they are not trained, skilled or competent. What they do is for marketing, propaganda, and virtue-signaling purposes, forcing their leadership to be hypocritical and spread such conduct downstream. Naïve investors, distant from on-the-ground realities, ultimately support this trend.
When conducting on-site visits, we analysts used to discuss the propaganda related to ESG. As time has gone by, we are talking less and less about this, for such discussion has come to be seen as politically incorrect. The new generation of analysts, people who have been brought up in the “woke” culture, cannot even see the game being played.
Condescension via EDI
EDI stands for Equality, Diversity, and Inclusion and is gaining momentum very rapidly. In a recent panel discussion I took part in, analysts were grilling mining companies. The first question a $8 million company faced was from a colored female who wanted to know why their board of directors lacked diversity.
Small companies simply do not have patience or the necessary leeway to get into virtue-signaling, although the damage that EDI causes to big companies is no less, even if it is hidden.
Why should “minorities” and women be dependent on a specific section of society, which of course, are males of European ethnicity? By implication EDI constitutes evidence that people of color, women, and LGBTQs cannot stand on their own feet and rise in life through their merit. And if this is true, why not accept it?
EDI is the bigotry of low expectations, much worse than on-the-face racism, where you know at least what the bigotry is about. EDI is extraordinarily condescending toward the so-called under-privileged groups. I find it repulsive if someone thinks I should get an extra push because of my skin color. I wonder why more women, people of color, and LGBTQs are not riswing up against the condescending approach, racism, and sexism inherent in EDI.
In India, where affirmative policy has a long history, I have no choice but to question how competent someone from the lower caste would be in a position of authority. Would I go to doctor from the lower caste? But similar thinking has to start in the West as EDI continues and grows. Suffering the most will be the competent people among the beneficiaries of EDI.
The true believers make the hollow concepts of ESG and EDI sound like the end of history. When I see too much of ESG/EDI in a company’s presentation, I move on without wasting any more of my time.
The path of political correctness and virtue-signaling that the West has undertaken always reminds me of South Africa, which at one point in time had First World infrastructure.
During my first visit to a company in Johannesburg more than a decade ago, I thought I had come to a car-show—the parking lot had some of the most expensive cars in the world. Black Economic Empowerment, their EDI, had enabled blacks to rise in the leadership hierarchy without any need for merit. As time has gone by, South Africa’s infrastructure has fallen apart. Power outages, lack of water supply, crime, potholes on the road, and a general lack of law and order have worsened continuously.
The Boeing 737 Max airplane suffered two fatal accidents. To what extent were the accidents attributable to design work had been done in low-cost, low work-ethic jurisdictions? Did those in leadership positions discuss the possibility of such risks, or was this deemed too politically incorrect?
To what extent were forest fires in California or the recent power outages in Texas a result of EDI, where people have been elevated to positions of authority despite a lack of competence? We will never know the specifics, for people in the West no longer say anything that might be seen as bigoted. Those who dare say something get booted out.
Errors accumulate with no one to challenge them. The ESG/EDI concepts pursued in the West are essentially copying the South African model of social change, which is anti-meritocratic and will destroy institutions and civilization.
Images from various company presentations
Image captions (where indicated) and editing by PT
Jayant Bhandari grew up in India. He advises institutional investors on investing in the junior mining industry. He
writes on political, economic and cultural issues for several publications. He is a contributing editor of the Liberty magazine. He runs a yearly seminar in Vancouver titled Capitalism & Morality.
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