It’s not enough for people in business to be committed to and actually do the right things. Now, they must trumpet their eternal love of ESG and EDI. Don’t know what those two acronyms mean? Read on. From Jayant Bhandari at acting-man.com:
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.
A typical, but hugely erroneous graph provided by many companies.
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.