Lastweeks accounting scandal at BT (LSE: BT-A) was yet another exampleof bad behaviour infecting a high profile company. Its also a starkreminder thatinvesting in equities can require patience as well as a willingness to tolerate capital risk.
With this in mind, how long should private investors whodidnt contributeto Tuesdays 20% share price fall be prepared to wait for the 30bn cap communications giant to recover?
Same old story?
Although companies will clearly differ in how well theyre able to respond to setbacks, it can pay to look at past examples.
Back in 2014, shares inTescosank following revelations that it has overestimated revenues by 250m. Heads rolled and Dave Lewis was brought in to steady the ship. Only in January last year did the share price appear to bottom out. On Friday, this stood at 205p. Thats still lower than before the revelation came to light and nowhere near the peaks achieved back in2007. Based on this example, BTs shareholders could be in for a long wait.
There are differences, of course. Those working in senior positions at Tescoappeared to be complicit in the scandal. Bycontrast, BTs management in the UK wasapparently unaware of the accounting irregularities until last October, despite rumours of itbeing common knowledgein Italy. Im not sure which is moretroubling.
While this may be simplyfying things, whats certain is that the rate of recovery will increase or decreasedepending on how BTs management responds. Last year, retailers Sports Direct and JD Sports were accused of turning a blind eyeto poor working conditions in their warehouses. Shares in the former fell continuing a trajectory that began in 2014. Shares in JD Sports however, barely moved. The reason? Probably the way in which these allegationswere handled. While the former engaged in a war of words with politicians, the lattersaidthat it would readilyopen itsdoors to an appropriate independent body to conduct an inspection.
So far, the signs are that BT is adopting the latters measured approach. On Friday, ittried to reassure investors by statingthatthe situation was under control, adding that its Head of Continental Europe has already been ousted from his position. If it can build on this then the damage should be short-lived and BTs share price will revert to being determined by the performance of the business rather than anything else. Recovery could be achieved inmonths rather than years.
Always diversify
Unfortunately, scandals can impact on any company without warning, even those in the markets top tier. Indeed, the situation at BT has once again shown that the larger and more complex a business becomes, the easier it is for dubiouspractices to go undetected or even ignored. Thats why its vital for private investors to diversify their holdingsso that theyre not dependent on any one firm to build their wealth over the long term.
Are shares in BT now cheap? Based on the usual metrics, it would appear so. Will shares of BT recover? Very probably. Will it require patience? Perhaps not as much as feared.The more transparent the company can be on its strategyto avoid a similar situation arising in the future, the more forgiving investors are likely to be.
Make no mistake
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Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Sports Direct International. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.