Thread by @Sanjay__Bakshi

What happens when someone blows the whistle?

Whistleblowers are the effective saints of civilization. They take great risk and sometimes they lose their lives too.

It's true that many whistleblowers have an agenda. They want to take revenge for some "wrongdoing". Or there may be a financial incentive. Or glory. Or something else. But the key thing is that they often know about some evil wrongdoing and now they can expose it far more safely.

It's true that when a whistleblower in a listed company sends information to the regulators, they will tend to sleep on it. But today, the world for whistleblowers has changed.

There are media outlets which will publish, if not the whole documents, then the summary of the allegedly incriminating documents and it will spread like wildfire.

For investors to take a stand that the investigations will take a while and it will be surely be suppressed etc etc misses an important point.

By putting the alleged incriminating information in the public domain, the whistleblower causes instant damage. How?

The cost of capital goes up. Instantly. And sometimes, the capital becomes totally un-obtainable. That makes some businesses, dependent on the "kindness of strangers" extremely vulnerable to collapse. Which is just what what the whistleblower wanted.

Generally speaking, investors under-appreciate the risk of a whistleblower's action on cost of capital. Take a look at companies (I won't name them) who had whistleblowers report on them.Look at their stock price before the report and the stock price today. You'll see what I mean

Once a company that has done something gravely wrong, loses reputation because of a whistleblower, it's virtually impossible to get it back.

Whistleblower actions, therefore, hurts companies where it hurts the most.

If you own shares in a Company and someone blows the whistle on it in a fairly serious manner, how should you think about the situation,

How should you NOT think? One thing you should not think is that assume that whistleblower news is irrelevant to the fundamentals. It isn’t. As I mentioned earlier, indecent exposure is correlated to cost of capital...

Another way to not think is to assume that you will wait for the investigations to be completed. You have to decide and you have to decide now. You will never have full information.

The way to think about these situation is the way Ben Graham thought about special situations. You have to think about the downside risk of remaining invested. If that risk is too high you have to ignore the upside and leave.

Investing in securities is not a like being in court of law where you have to assume innocence until guilt is proven. In the stock markets it’s often prudent to assume the opposite.

You may disagree with me. And I will be wrong on some of the occasions but statistically speaking, the correct approach, if you want to protect your capital, is to assume guilt until innocence is proven.Remember that lesson. It will save you money and it will save you from stress