A wolf hiding in sheep's clothing? This checklist will help you identify such companies!

Wednesday: The Independent Investor FROM THE DESK OF MILES EVERSON: Happy midweek and welcome to “The Independent Investor!” We’re excited to share with you another insightful topic for today. Each Wednesday, we publish articles about basic investing tips, strategies, insights, and advice. Our goal is to help you strategically think about your financial choices and achieve true financial freedom in the long term. For today’s article, let’s talk about a coaching comment my friend and colleague, Professor Joel Litman, delivered to his workforce at Valens Research. Continue reading below to know how you can avoid being “eaten” by corporate “wolves.” CEO, MBO Partners Chairman of the Advisory Board, The I Institute

A wolf hiding in sheep's clothing? This checklist will help you identify such companies! What picture comes to your mind when you hear the word, “fraud”? Smoke-filled rooms? Shady people skulking in alleyways? SUVs meeting in quiet parking lots? Some of you probably think of something out of a Hollywood movie—such as a bunch of folks lounging around their executive offices—whenever you hear stories of fraud. However, in the real world, especially in the investing world, fraud isn’t always what you expect or imagine it to be. Oftentimes, if someone is trying to take you for a ride, that person will do his/her best to make it look like that’s exactly what he/she is NOT doing. Protecting Your Investments from Corporate Fraud Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist of Altimetry Financial Research, says he and his team of financial analysts often tell their Microcap Confidential Advisory subscribers that even the most “healthy” and “successful” businesses can actually be wearing sheep’s clothing. By the time unwitting investors realize their mistake, their money has already been devoured by a hungry “corporate wolf.” According to Professor Litman, the allure of high returns and the fear of missing out (FOMO) can cause investors to ignore warning signs and rationalize away red flags. What else? More often than not, smaller companies get overlooked by regulators and Wall Street. As a result, investors must take it upon themselves to police such companies. Professor Litman and his team created a framework—the Do Not Buy Checklist—to help investors determine whether or not such companies are trustworthy. The checklist looks something like this: As you can see on the photo above, the checklist contains a range of major warning signs for companies. Using this list helped Professor Litman and his team discover issues in electric-vehicle company Nikola in December 2022. Nikola: Pushing the Boundaries of… Possibility? In June 2020, Nikola went public via a special purpose acquisition company (SPAC). [Special purpose acquisition company (SPAC): A publicly traded company created for the purpose of acquiring or merging with another existing company.] As investors and industry experts rushed to find the “next Tesla,” Nikola founder and former CEO Trevor Milton was happy to oblige. He proclaimed Nikola was going to revolutionize the U.S. transportation industry by launching a wave of electric- and hydrogen-powered tractor trailers, and building out stations to fuel these vehicles around the U.S. Throughout much of the 2010s, Milton pushed the story of Nikola’s “innovation.” However, when the company went public, all of Milton’s hype caught up with him. Milton was convicted of fraud in October 2022 for lying about the progress of research and innovation at Nikola. He repeatedly staged false promotional events about the company’s trucks, including a fake “road test” where a truck was just pushed down a slight slope. That’s not all! Milton’s lies were so endemic that even the CEO who helped make Nikola public, Mark Russell, didn’t find out the company’s trucks had no power until after he’d been hired. So, using the Do Not Buy Checklist, Professor Litman and his team found company red flags that triggered three items on the list. Here’s how it turned out… As with other companies that engaged in fraudulent activities, Nikola ended up losing significant market value. Its stock fell from its USD 80-per-share peak to USD 12 per share by the time Milton was charged with wire fraud in July 2021. Now, Nikola is trading for less than USD 1 per share. Since Milton has been kicked out of the company, the management team has made progress… and investors might be tempted to give it the benefit of the doubt under new leadership. However, as Professor Litman and his team flagged in December 2022, Nikola still has lots of issues… Russell, who didn’t know the trucks didn’t work when he signed on as CEO in 2019, helped the company sell its first trucks. In such cases, it’s easy to assume bringing the company to revenue would be a cause for celebration. … but that’s not what happened. Almost immediately, Russell announced he would step down as Nikola’s CEO at the end of 2022. He has also unloaded roughly 80% of his shares in the company. That’s not really a vote of confidence. Professor Litman and his team continue to warn investors to steer clear from Nikola. There’s no “miraculous turnaround” to be expected from it anytime soon. The bottom line here? When putting your money to work, make sure to heed the warning signs. According to Professor Litman, red-flag checklists will help you identify “corporate wolves” and stocks that could tank your portfolio… BEFORE buying in. — In line with MBO Partners' continuous dedication to supporting you and your business, we want to notify you about an opportunity to access potential tax credits of up to USD 32,200. The American Rescue Plan Act of 2021 provides specific provisions for self-employed individuals, known as the Self Employed Tax Credit (SETC), for which nearly everyone with Schedule C income qualifies. This acknowledges the unique challenges faced by those who work independently especially during times of illness, caregiving responsibilities, quarantine, and other circumstances. There are two criteria you must meet to qualify for receiving the tax credit of up to USD 32,200. Click here to see how you can obtain the SETC to know more about this. Act NOW! This credit will expire on April 15, 2024, so we encourage you to submit early to see if your business qualifies. Also, if you know others who may qualify for the SETC, you may share these details with them.     Hope you’ve found this week’s insights interesting and helpful. Have you ever wondered how some businesses continue to prosper and how some investors continue to have strong portfolios even in the midst of an unstable economy and fluctuating market? Learn more about the importance of discipline in investing in next week’s article!