Enron - I still don't feel sorry for these folks... (1 Viewer)

[Nathan A]

Watch "Enron: The Smartest Guys in the Room" (the documentary recently released on DVD) and see a taping of an employee meeting with a Q&A session that included this question: "Can I invest all of my 401k in company stock?" The company's answer? An emphatic "yes." The company clearly encouraged this misguided practice. But when this advice is coming from an employer that is being celebrated by almost the entire business world and is landing on the cover of every business magazine, it's easy to see that some people could choose not to diversify. Is it entirely their fault? It just seems hard to say so. Not everyone knows much about finances. And they were being blatantly lied to and misled by a powerful and intimidating company.

 

[Eric_L]

Nathan A -

.. and that seems to be where most here disagree with me - my ascertation that diversification is a basic and simple concept, not an andvanced portfolio strategy reserved for the sophisticated.

 

[D. Scott MacDonald]

Maybe, maybe not. I have worked for a couple of companies where employees tended to under-diversify in favor of the stock. Even the sophisticated did it, and the un-sophisticated followed. In fact, employees loved to tell the story of the $200,000 minivan - and nobody wanted to be that guy.

Here was the reasoning why the sophisticated would do this:
1) Historically the stock would have made them rich, whereas diversifying wouldn't.
2) They understood the companies business and the relative volatility. For example, others mentioned the pharmacutical business which is very volatile. Drugs can get pulled, lawsuits can be filed, etc. that can make the stock drop very quickly. A computer company (my line of business), on the other hand, is less volatile. Employees can track the competition and trends. If the company is legally reporting it's finances, a bad quarterly report or announcement may cause the stock to fall, but would typically not lose half it's value overnight. Therefore, employees would ride the gravy train until they thought that it was time to get off (and many that I've known were very successful at it).

I would assume that had Enron accurately reported it's finances, the stock would have started dropping much slower than what it did, and those that under-diversified would have had adequate time to switch tactics before they lost a significant amount. As it was, it dropped like a rock and the employees didn't have a chance. This is why I think that the criminal activity is so important in this case, and I tend to have more sympathy for the investors than you do.

 

[Eric_L]

D. Scott;
If it were that simple then we'd all be millionaires. The sttrategy you discuss is the 'sell before it goes down' strategy. That is sorta like the 'move right before the earthquake' strategy, the 'put on a seatbelt only right before an accident' strategy, or the 'Build an ark before the storm' stragegy. Only one of which has ever been successful - and that only with divine intervention.

Sophisticated investors know this for what it is - incorrect. Unsophisticated investors know that it is imprudent to be undiversified. If they want to take an imprudent risk it is their own business - but it is their own responsibility as well. (remeber, "it is better to count on being good than to count on being lucky") Besides, only half of investing is about making money - the other half is about not losing it.
Q: Who doesn't want to be a millionaire?
A: A billionaire.

As far as your statement that the tech sector is less volitile than the healthcare sector...