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Picking stocks: add governance assessment for a complete picture

Published Thu, Aug 5, 2021 · 05:50 AM

IN evaluating whether to buy a stock, investors might typically study the company's past profit and loss statements and balance sheets, comparing the numbers with others in the same sector.

Some investors combine this with technical analysis, which is the study of price charts to try and identify patterns that can aid in predicting the market's direction. These approaches have gained widespread acceptance and have probably worked reasonably well for many investors. However, there is another less-taught dimension to selecting investments that is equally important and should form part of the evaluation process - one that relies on the undeniable logic that a company is only as good as the people who run it.

This is the governance approach to investing, which is based on the notion that well-governed companies are less likely to collapse because of fraud or some other wrongdoing. Furthermore, companies that are well-governed and conduct their affairs with integrity are more likely to have better market reputations which in turn could positively impact their financial performance.

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