Investors are often confronted with unexpected developments, and the last decade offers an abundance of examples. Ten years ago, for example, Brazil was on the verge of a currency collapse, and General Electric was among the largest and most admired firms on the planet. Who would have thought that Brazilian stocks would soar sevenfold during the subsequent ten-year period, while GE shares fell 70%?
A lucky few may be able to exploit such extreme outcomes to enhance their investment results. But history offers compelling evidence that shows that those making concentrated bets on companies or countries are more likely to get blind-sided by unpredictable events. Markets have 101 ways to teach us the virtues of diversification.
While sifting through our stacks of news clippings in preparation for our customary review of the year's events, we came across a number of tidbits from the more distant past that offer some lessons. These quotes turned out to be oopses by those who spoke or wrote them. And unfortunately for them, we noticed.
"It's the only company in the S&P 500 with sales of more than $30 billion that has double-digit sales growth. 'WorldCom is the must-own large-cap growth stock,' says Salomon Smith Barney analyst Jack Grubman." Pablo Galarza, and Peter Keating, "The Twelve Best Investments for 1999." Money, January 1999.
WorldCom filed for bankruptcy on July 21, 2002—the largest in US history at that time. Chief executive Bernard Ebbers was convicted of conspiracy and securities fraud on March 15, 2005 and is currently serving a twenty-five-year prison term. In 2002, Grubman agreed to a settlement with regulators that included a lifetime ban from the securities industry. Black and white strip oops.
"On May 19 [2001], Apple will open a swanky new retail store—the first of as many as 110 nationwide—at Tyson's Corner Galleria mall outside Washington. . . . Since PC retailing gross margins are normally 10% or less, Apple would have to sell $12 million a year per store to pay for the space. 'I give them two years before they're turning out the lights on a very painful and expensive mistake.'" Quotation attributed to David A. Goldstein, president Channel Marketing Corp. Cliff Edwards, 'Sorry, Steve: Here's Why Apple Stores Won't Work" Business Week, May 21, 2001
"Apple, all in all, should sell nearly one billion dollars' worth of iPods this year. . . . Its shares have risen 51% in the past year to a recent $23. . . . But behind the hype and buzz surrounding the iPod and Jobs, there are problems stewing at Apple. Its core computer business is withering. Apple sold just 3 million computers in its last fiscal year, which ended in September—900,000 less than it sold in 1996. . . . Job's other strategy to boost market share is Apple retail outlets . . . but, so far, the stores have done little to increase market share and could be bleeding red ink.' Apple will remain a company that is neat from a product and consumer standpoint but c--- from an investor standpoint.'" Quotation attributed to Chris Bonavico, portfolio manager, Transamerica. Stephen Gandel, "Why iPod Can't Save Apple." Money, April 2004.
For the first time, Apple Inc. ranked #1 in Fortune magazine's annual "Most Admired Companies" survey published on March 17, 2008. A Fortune cover story appearing November 23, 2009 celebrated Apple chief executive Steve Jobs as "CEO of the Decade." Adjusted for splits, Apple shares that sold for $23 in April 2004 closed at $390.86 on December 18, 2009. Oops.
"Stick with storage . . long term, this simple fact is true: A company can postpone buying new PCs or upgrading its network, but it can't stop producing digital data. The stuff must be put somewhere, and it increasingly gets stored in many places. . . Buy EMC Corp. at $44 per share...Amazon.com is the exact opposite [of eBay]; it faces—and has yet to solve—all the problems of offline retailers. Sell Amazon at $12 per share." Stephanie N. Mehta, "Ten Tech Trends to Bet On." Fortune, March 19, 2001.
EMC shares closed at $17.34 on December 18, 2009, down 60%, while Amazon shares closed at $128.48, up 907%. Darn trends. Oops.
"Federal Reserve Chairman Alan Greenspan said the central bank is already developing plans for a world without Treasury securities and gave members of the bond industry something of a nudge to begin their own planning. . . . Mr. Greenspan expressed confidence that worker-productivity gains will continue, enabling the nation's debts to be paid off relatively soon." Gregory Zuckerman, "Greenspan Encourages Bond-Market Professionals to Prepare for World Without Government Debt." Wall Street Journal, April 30, 2001.
No explanation required as to whether or not our nation's debts have been paid off. Itsy-bitsy oops.
"Sandy Weill has built Citigroup into a financial services empire. Is his formula for success a blueprint for the rest of the industry? . . . Despite gale-force winds battering the financial service industry—bear market, recession, Sept. 11, Enron, Argentina—Citi has grown earnings at a 17% annual clip over the past three years. Washington Mutual's back-to-basics banking—and customer service—attracts the average Joe and leaves rivals in the dust. . . . That focus has served Washington Mutual and its shareholders well." Jon Birger, "Leader of the Pack." Money, July 2002.
Washington Mutual was seized by federal regulators on September 25, 2008. The closing price for Citigroup shares was $38.49 on July 1, 2002 and $3.40 on December 18, 2009. Double oops.
These are just a select few notable gaffes that show the folly of forecasting. Big bets on the future that may be life-changing events for some market participants often amount to little more than rounding error for diversified investors. You don't need predictions to be a successful investor. To borrow from a brilliant nobel laureaute: diversification is your buddy.
To Your Prosperity ~ Kevin Kroskey
A lucky few may be able to exploit such extreme outcomes to enhance their investment results. But history offers compelling evidence that shows that those making concentrated bets on companies or countries are more likely to get blind-sided by unpredictable events. Markets have 101 ways to teach us the virtues of diversification.
While sifting through our stacks of news clippings in preparation for our customary review of the year's events, we came across a number of tidbits from the more distant past that offer some lessons. These quotes turned out to be oopses by those who spoke or wrote them. And unfortunately for them, we noticed.
"It's the only company in the S&P 500 with sales of more than $30 billion that has double-digit sales growth. 'WorldCom is the must-own large-cap growth stock,' says Salomon Smith Barney analyst Jack Grubman." Pablo Galarza, and Peter Keating, "The Twelve Best Investments for 1999." Money, January 1999.
WorldCom filed for bankruptcy on July 21, 2002—the largest in US history at that time. Chief executive Bernard Ebbers was convicted of conspiracy and securities fraud on March 15, 2005 and is currently serving a twenty-five-year prison term. In 2002, Grubman agreed to a settlement with regulators that included a lifetime ban from the securities industry. Black and white strip oops.
"On May 19 [2001], Apple will open a swanky new retail store—the first of as many as 110 nationwide—at Tyson's Corner Galleria mall outside Washington. . . . Since PC retailing gross margins are normally 10% or less, Apple would have to sell $12 million a year per store to pay for the space. 'I give them two years before they're turning out the lights on a very painful and expensive mistake.'" Quotation attributed to David A. Goldstein, president Channel Marketing Corp. Cliff Edwards, 'Sorry, Steve: Here's Why Apple Stores Won't Work" Business Week, May 21, 2001
"Apple, all in all, should sell nearly one billion dollars' worth of iPods this year. . . . Its shares have risen 51% in the past year to a recent $23. . . . But behind the hype and buzz surrounding the iPod and Jobs, there are problems stewing at Apple. Its core computer business is withering. Apple sold just 3 million computers in its last fiscal year, which ended in September—900,000 less than it sold in 1996. . . . Job's other strategy to boost market share is Apple retail outlets . . . but, so far, the stores have done little to increase market share and could be bleeding red ink.' Apple will remain a company that is neat from a product and consumer standpoint but c--- from an investor standpoint.'" Quotation attributed to Chris Bonavico, portfolio manager, Transamerica. Stephen Gandel, "Why iPod Can't Save Apple." Money, April 2004.
For the first time, Apple Inc. ranked #1 in Fortune magazine's annual "Most Admired Companies" survey published on March 17, 2008. A Fortune cover story appearing November 23, 2009 celebrated Apple chief executive Steve Jobs as "CEO of the Decade." Adjusted for splits, Apple shares that sold for $23 in April 2004 closed at $390.86 on December 18, 2009. Oops.
"Stick with storage . . long term, this simple fact is true: A company can postpone buying new PCs or upgrading its network, but it can't stop producing digital data. The stuff must be put somewhere, and it increasingly gets stored in many places. . . Buy EMC Corp. at $44 per share...Amazon.com is the exact opposite [of eBay]; it faces—and has yet to solve—all the problems of offline retailers. Sell Amazon at $12 per share." Stephanie N. Mehta, "Ten Tech Trends to Bet On." Fortune, March 19, 2001.
EMC shares closed at $17.34 on December 18, 2009, down 60%, while Amazon shares closed at $128.48, up 907%. Darn trends. Oops.
"Federal Reserve Chairman Alan Greenspan said the central bank is already developing plans for a world without Treasury securities and gave members of the bond industry something of a nudge to begin their own planning. . . . Mr. Greenspan expressed confidence that worker-productivity gains will continue, enabling the nation's debts to be paid off relatively soon." Gregory Zuckerman, "Greenspan Encourages Bond-Market Professionals to Prepare for World Without Government Debt." Wall Street Journal, April 30, 2001.
No explanation required as to whether or not our nation's debts have been paid off. Itsy-bitsy oops.
"Sandy Weill has built Citigroup into a financial services empire. Is his formula for success a blueprint for the rest of the industry? . . . Despite gale-force winds battering the financial service industry—bear market, recession, Sept. 11, Enron, Argentina—Citi has grown earnings at a 17% annual clip over the past three years. Washington Mutual's back-to-basics banking—and customer service—attracts the average Joe and leaves rivals in the dust. . . . That focus has served Washington Mutual and its shareholders well." Jon Birger, "Leader of the Pack." Money, July 2002.
Washington Mutual was seized by federal regulators on September 25, 2008. The closing price for Citigroup shares was $38.49 on July 1, 2002 and $3.40 on December 18, 2009. Double oops.
These are just a select few notable gaffes that show the folly of forecasting. Big bets on the future that may be life-changing events for some market participants often amount to little more than rounding error for diversified investors. You don't need predictions to be a successful investor. To borrow from a brilliant nobel laureaute: diversification is your buddy.
To Your Prosperity ~ Kevin Kroskey