Few have learned from the mistakes of Enron Corp.’s afflicted investors
NEW YORK » If you've spent this past week thinking about Kenneth Lay, Enron Corp.'s founder and a convicted felon who died Wednesday at 64, turn your thoughts to something more constructive: your own portfolio.
The lessons of the Enron debacle, which wiped out more than $60 billion in market value and almost $2.1 billion in pension plans, were clear, yet investors continue to make some of the same mistakes that lost them money and sleep when Enron imploded.
Some of the lessons we should have learned:
» Don't bet the house on any company, especially the one you work for.
Remember the Enron lineman whose $348,000 worth of company stock in his 401(k) dwindled to $1,200? Similar stories from Enron were everywhere after the company's 2001 bankruptcy filing. Still, when human resources consultant Hewitt Associates Inc. surveyed 401(k) plans in 2005, more than one in four workers held half or more of their total 401(k) balance in their employers' stock.
If you work for a company, your future is already tied to its future. Business and life being what they are, your company's future is by no means a safe bet. Don't double down.
Of course, some companies make it harder to diversify. Verizon Communications Inc. currently pays all of its 401(k) match in company stock until age 50, at which point employees can allocate half to other investments. Starting in January, the plan will change and employees can elect to get half their match in cash and all employees will be able to sell Verizon shares in their retirement accounts on the third anniversary they are allocated.
» Remember that where there's trouble you can see, there may be more on its way.
You'd think that after Enron, investors would avoid a company already in regulatory trouble. After all, regulatory problems now are a good sign that even larger problems are lurking.
Not so. Before options trader Refco Inc.'s $583 million public offering in August 2005, its financial statements looked fine, but the "risk factors" section of the company's prospectus should have kept investors wallets tightly shut.
Refco said in a prospectus for the offering that it had received a Wells notice from the Securities and Exchange Commission that said the agency intended to recommend civil enforcement following an investigation of short sales by Refco.
Santo C. Maggio, the president and CEO of Refco Securities, was in negotiations with SEC staff and, according to the filing, was prepared to accept an administrative order that would suspend him for a year from any supervisory duties. The filing said he would keep his job at the company, which should have sent even more red flags shooting up.
The U.S. Attorney's Office for the Southern District of New York had also subpoenaed documents related to the SEC investigation, which should have sent those red flags even higher.
Refco finances unraveled in October 2005 and the company filed for bankruptcy within weeks.
» Part of being a good manager is being able to take criticism.
Former Enron CEO Jeffrey Skilling responded to one pointed question on a conference call with investors by calling the questioner a nasty name. After securities analyst John Olson was quoted in a magazine saying that the company's assets were mostly on paper, Lay sent him a note by courier that said, "John Olson has been wrong about Enron for over 10 years and he is still wrong. But he is consistent."
Executives are not just adults, they are adults who make more money than almost any other adults on the planet. Even those who aren't a Ken Lay or Jeffrey Skilling sometimes warrant criticism. But some don't seem able to take their hits.
A recent example of a company whose executives seemed less than open to shareholders' questions was Home Depot Inc., which didn't allow questions during its annual meeting in May, when CEO Robert Nardelli's five-year $123.7 million pay package (excluding stock option grants) was an issue. Then there was Pfizer Inc., whose CEO, Hank McKinnell, said activist shareholders who criticized his $83 million retirement package only want "more board power for their special interests."
» If you don't understand what the company does, beware. If you don't understand their disclosures, run. And if you don't have time to read disclosures, ask yourself why you bother trading individual stocks.