Life is a masquerade, in which things aren’t always what they seem.
When that happens in the investing world, a lot of wealth can get annihilated in a hurry.
So let’s take a spin through some of history’s biggest investing disasters. All hold lessons for investors that are still relevant today.
1) 2001 – Enron
A fast-growing energy company made a killing trading esoteric derivatives. The insiders disclosed massive accounting fraud and Enron went into a death spiral.
Thousands of employees lost their pensions or were sacked.
Kenneth Lay and Jeffrey Skilling, two top executives, were convicted of fraud.
2) 2002 – WorldCom
The telecommunications company went into a tailspin after revelations of an accounting scandal that created billions in illusory earnings.
The company, once the second largest long-distance carrier in the U.S., made headlines again with a $104 billion bankruptcy filing.
Several WorldCom executives subsequently pleaded guilty to fraud charges and CEO Bernard Ebbers is serving a 25-year prison sentence.
3) 2009 – AIG
Once a well-respected insurance conglomerate, AIG played a starring role in the 2008 financial crisis.
It’s downfall? Exotic derivatives that its own executives at its London branch office didn’t properly understand.
AIG’s $100 billion bailout by Washington was one of the most controversial government salvage jobs in American history.
4) 2013 – Blockbuster
Did the digital era killed the video store? Not entirely. Blockbuster’s management played a big role as well.
The video rental business was hugely profitable in the 1990s.
But rental stores like Blockbuster were slow to grasp changing consumer tastes and the rise of streaming services.
Netflix (NFLX) made the transition from DVD rentals to streaming. Blockbuster never came close.
5) 2014 – American Apparel
Investors in American Apparel, whose stock is down about 47% over the past year, had reason for cheer when the retailer’s board of directors fired its bad boy CEO Dov Charney for the company’s performance slide and alleged ethical lapses.
Yet here’s the thing: Charney stayed on as consultant at full pay and has been issuing CEO-like directives to store managers to improve sales.
The housecleaning the board promised never really took place, and investors have paid the price.
So what’s the takeaway here?
Companies are at risk of blowing up when corporate governance and board oversight is weak (WorldCom, Enron, American Apparel), risky financial strategies run amok (Enron/AIG), disruptive technologies aren’t embraced (Blockbuster) and self-destructive CEOs aren’t reined in (American Apparel, WorldCom, Enron).
You’d think such lessons wouldn’t have to be relearned every couple of decades.
Sadly, it seems they do.
DISCLAIMER: The information contained in this article is general in nature and not intended as specific advice. Neither Covestor Limited nor its representatives are engaged in rendering tax, accounting or legal advice. A qualified professional should be consulted regarding the effect of such considerations on the matters covered in this article.
