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How Do You Misplace $2.1 Billion?

“The money never entered the country.”

This is from the head of the Philippine central bank Chairman Nestor Espenilla on Thursday June 18th.

He’s talking about $2.1 billion that was supposed to be held in escrow in two Asian banks.

According to another report, “there was no evidence such accounts ever existed and that documents provided to this company’s auditor Ernst & Young (EY) were forgeries.”

Uh oh.

The company in question around this missing $2.1 billion is Wirecard. They’re a German software company that works in the finance industry.

The next day, Friday June 19th Wirecard’s CEO Markus Barun resigned.

Also, on this day the company missed the deadline to release its financial reports due to these ongoing investigations. This trigged a credit freeze on the company’s assets and operations.

This is all bad for the company and the people involved in this scandal. But it’s even worse for shareholders.

In a 4 day stretch from the close of the market on June 17th to as of this writing on Sunday June 21st before the market opens Wirecard shares plummeted from $58.50 per share to $13.75 per share.

This is a loss of 76.5% in 4 trading days that you can see in the chart below.

But this doesn’t even show the full crash of Wirecard shares.

On September 18th, 2019, the company hit a high of $87.25 per share. This means the total loss from that date to today is 84.2%in 8 months.

This is a massive destruction of value that you can see below.

And this isn’t even the first news about potential fraud at the company either…

In October 2019 The Financial Times reported that profits in Wirecard’s Dubai and Dublin units appeared fraudulent.

The finding in October led to the more recent investigations mentioned above.

This looks like fraud on a massive scale.

Which probably leads you to the question… Why did anyone still own its stock after the initial report in October 2019?

Because the company showed massive growth in revenues, huge profits, and a ton of cash in its financial statements in recent years.

From 2009 to 2020 its revenue grew from $256 million to $2.836 billion. Or growth of 10X or 1,000% in only 11 years.

The company regularly showed high operating profits in the 20%+ range over the last decade.

I look for anything above 10% on a consistent basis to consider a company a great potential investment.

It also showed huge free cash flow production north of 14% on average since 2015… I look for anything above 5% to consider a company a great potential investment.

And according to its most recent financial reports it had $3.8 billion in cash on the balance sheet.

In other words, if you read this company’s financials statements you thought it was a great looking company. But this is only at its base level.

Editor’s Note – The huge growth in revenue should be a red flag to people since revenue doesn’t grow that fast usually… Even at high tech companies.

For example, Google’s revenue grew 468% in this same period and its one of the best run and most dominant companies in the world.

This is why you must dig deep when looking at investments. And illustrates why you can’t rely on just its ratios and metrics.

You must dig deeper by reading news about the company to see if anything bad is happening.

And you also must read its most recent financial reports so you can figure out if you can trust a company’s management.

If you can’t trust managers, you shouldn’t invest in it.

No matter what the potential undervaluation is. No matter what the potential upside is. And no matter what the numbers are showing you.

If you can’t trust managers, you shouldn’t invest in the stock. Ever

It all goes back to the common saying “if it sounds too good to be true it probably is.” In finance this is usually true too.

This is also why you must dig deeply into any investment you’re considering… So you can figure out both the good and the bad about any investment.

Because no matter how great an investment looks… There are always risks.

Especially for us as outside investors. We can look at the company’s internal books. So we must rely only on the public information we can find.

Yes, it looks like there was fraud going on here and that the financial statements the company made public were not correct.

But the revenue still should have been a red flag. So should the first report of fraudulent info in October. And I guarantee if I were to look at the company’s most recent annual report there would be red flags in there too.

When I look at any investment I purposely search out the red flags so I can avoid issues like this.

If I find too many red flags in an investment it means I can’t trust managers. And I never invest. Ever.

This is my #1 rule in investing. And its only I highly recommend you use as well.

It will help you make better investment decisions by helping you stay away from investments with managers you can’t trust.

If you follow this one rule, you’ll save yourself from a lot of frustration and lost money for the rest of your investment life.

And doing these things will help you earn higher returns than average investors.

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