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QuestionsCategory: Financials QuadrantAudit Issue (how to prevent)
Zhi Ming Cheah asked 5 months ago

Hi, i have 2 questions.

https://www.theedgemarkets.com/article/serba-dinamik-hits-limit-down-companys-audit-issues-after-trading-resumed-today

Assuming I invested into serba dinamik Or lets say i invest in Kpower. 

1) What are the potential red flags I should look after to prevent in investing into company that may face audit issue (which wipes out all your return in few days)?

https://www.e-serbadk.com/heres-why-i-think-serba-dinamik-holdings-berhad-klseserbadk-might-deserve-your-attention-today/

In your article, you highlighted about their crazy growth but now as we all can see, their stock price has plunge from 1.61 to 0.54 (66% drop).
So Assuming again If you owned this stock at the average price of 1.61, When the news is out about Audit issue, in 1 day, the stock limit down by 30%, as an investor, should i sell (cut loss) or wait? ( of course assuming you don’t know the fact that it will further drop till 66%)

Jieren Zheng replied 5 months ago

I think you can look at the integrity of the management (like running into some troubles with authorities) or related party transactions that are undeclared, though many times, nothing happens and suddenly one day it becomes a big issue when there’s problems. When markets are rising all is well.

I would cut losses and wait it out I guess.

That’s why position sizing is really really important.

Victor Chng replied 5 months ago

Thanks JR

1 Answers
Victor Chng answered 5 months ago

Hi Zhi Ming,
 
1.As what Jieren had mentioned, tracking the management is the only way to prevent investing in audit issue company. 

2.When audit issue happen means financial numbers and management cannot be trusted already. So I cut losses immediately regardless the price.