Devina Mehra: Why external analysts can often see something that a company’s own managers cannot

The interesting thing I have learnt over the years is that as an outsider, especially one with an overview of many others industries, economic history and other geographies, it is possible to see a pattern or a pitfall that the company management completely misses.

The greatest blind spots are often in a company’s biggest decisions because, beyond a point, its management gets committed to, say, a new acquisition or starting a new business or bidding for a licence, and stops really evaluating whether it makes economic sense. The lessons of history are forgotten.

Look at the airline industry, for instance. Damania, ModiLuft, East West and NEPC Airlines were among the first lot of private air carriers in India in the 1990s. All eventually shut down, but this fact was merrily forgotten when Kingfisher, Deccan and Jet Airways started a few years later. When their story was about to end, in came SpiceJet, Go Air and others.

At the time of the Corus acquisition by Tata Steel nearly two decades ago, I had presented an analysis on business television why it would add to profits and cash flows for exactly two years and then the problems would begin to show. That is exactly how it turned out.

Around 2007, I remember making a presentation to several fund managers explaining how the madness over telecom shares would not last. This movie had played out in many countries, and there was a particular way that subscriber growth would taper, price-to-earning ratios would shrink and the sector’s stocks would underperform. Not many listened. But the film played out exactly the same way in India, with the highs of telecom shares not being crossed for well over a decade.