RIYADH, 21 March 2005 — Change is inevitable. Problems are inevitable. Companies are vulnerable, but the biggest and the best of them also have survivability. In investing, the returns of being calm and contained are rewarded generously. Internal or external factors can occur anytime, sporadically, individually or simultaneously, which may impact the performance of any company to various degrees. Companies are not assured a smooth ride all the time. Road bumps occur occasionally and only the weak ones get seriously impacted. If the fundamentals of the company are good it will recover from it’s problems sooner or later, and so does its stock price. The ability to detect survival in a company at a time of trouble is very valuable, and this can be rolled into profit.

Many companies have the talent to turn a problem into an opportunity. A successful management approach is to recognize a business problem and announce a meaningful solution to it, before the issue gets chewed up by the media. A classical example is what happened to Toys “R” Us, a multinational toy vendor, in early 2001. The media hinted about a recent increase in the operating expenses of the company. Instead of denying the rumor or justifying their actions, Toys “R” Us management immediately acknowledged the problem, identified the causes and announced proper measures to address it. The outcome of the above problem is summarized in the following CBS.Marketwatch report — “Shares of Toys “R” Us jumped as much as 8 percent after the concern said it’ll slash 1,900 jobs and take a $213 million pretax charge against fourth quarter results”. Instead of ignoring the issue or justifying the problem, the company acknowledged it and turned it around as an opportunity.

Some problems turn out to be too big and challenge the survival of many companies. A quick survey of the list of companies that existed some fifty years ago shows that a large number do not exist anymore. Some were bought out, many merged with or got acquired by other companies, and the rest filed for bankruptcy. Prudent investors maintain a balance between the need for a high return on their investment, and “the actual return of their investment”.

Choosing the wrong company, or sticking with a company after it shows serious signs of deterioration are the main causes of regularly increasing the number of unhappy investors. Investors make mistakes all the time, but they either don’t recognize them or else blame them on forces from “outerspace”. The basic intention of investors is to protect and increase their wealth. Although many succeed in occasional transactions, but when measured over a long period the percentage of winners drops down significantly. Those who don’t do well develop a negative attitude towards the stock market, and eventually join the “unhappy investor” club. Here is what the unhappy investors think about the stock market:

a- Stock: A magical piece of paper that is worth $33.75 until the moment you buy it. It will then be worth $11.50.

b- Bond: What you had with your spouse until you pawned his or her golf clubs to invest in Amazon.com.

c- Broker: The person you trust to help you make major financial decisions. Please note that the first five letters of this word spell broke.

d- Bear: What your trade account and wallet will be when you take a flyer on that hot stock tip your secretary gave you.

e- Bull: What your broker uses to explain why your mutual funds tanked during the last quarter.

f- Margin: Where you scribble the latest quotes when you’re supposed to be listening to your manager’s presentation.

g- Short Position: A type of trade where in theory, a person sells stocks he doesn’t actually own. Since this also only ever works in theory, a short position is what a person usually ends up being in, i.e. “The rent sir? Hahaha, well, I’m a little short this month.”

h- Commission: The only guaranteed way to make money in the stock market, which is why your broker charges you one.

i- Yak: What you do into a pail when you discover that your stocks have plunged and your broker is making a margin call.

(Salim J. Ghalayini, [email protected], is the author of “Stocks for the Practical Investor”. He manages several investment accounts.)