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Lessons From The Worst Stock Crashes Ever

Investment history is rife with infamous examples of stocks that quickly blew up and crashed in flames to the ground, like the Hindenburg at Lakehurst, New Jersey. Investors lost their shirts, before they could cry out: “Oh, the humanity!”

Aside from being fiery catastrophes, these equity plunges also are instructional. Below is a quick look at three incidents that were among the most painful and historic. With many analysts now calling for a market correction, you ignore these lessons at your peril.

Bear Stearns

We’re all sadly familiar with the tragedy of Bear Stearns, the investment house that became overexposed in the market for securitized subprime mortgages.

In March 2008, Bear Stearns’ stock plummeted from its 52-week high of $133.20 per share, traded before the crisis, to an astonishing low of $2.00, on a $236.2 million buyout offer from JPMorgan Chase (NYSE: JPM).

In January 2010, new owner JPMorgan discontinued using the Bear Stearns name, which had become synonymous with greed and reckless mismanagement. The collapse of this once-venerable Wall Street name precipitated the Great Financial Meltdown of 2008, the consequences of which still reverberate to this day.

While Bear Stearns was in a steep dive, some analysts on CNBC were actually telling investors that Bear Stearns was “fine” and they shouldn’t take out their money.

Enron

Once touted as an exemplar of American enterprise, this energy company was number seven on the Fortune 500. It seemed too big to fail; a huge entity that could never possibly run out of money. But it did — and fast.

Enron’s stock price hit a high of $90 per share in mid-2000; by the end of November 2001, the price had plummeted to less than $1 a share, causing shareholders to lose nearly $11 billion.

The company went bankrupt in December 2001. A complex web of egregious accounting irregularities and financial abuses came to light, leading to federal investigations, regulatory reforms, and prison sentences for some of the company’s management.

As Enron was going down in flames, its top executives were telling employees that the company was still in good shape and they should keep buying the stock for their retirement accounts and nest eggs. Thousands of loyal Enron workers were financially wiped out.

Coleco Industries

During the technology boom of the early 1980s, this maker of children’s plastic swimming pools diversified into bargain-priced video games and home computers. It also came out with an oddity called the Cabbage Patch doll.

Cabbage Patch dolls became a craze. In August 1982, the company’s stock was languishing at about $7 a share. By June 1983, it was trading at a whopping $65 a share.

When the fad for Cabbage Patch dolls faded, Coleco’s stock fell off a cliff. First, shares plunged more than 50% from June to August 1983. By March 1984, Coleco stock had plummeted to roughly $10 a share. In 1988, the company filed for bankruptcy.

The takeaways from these tales…

Beware of the madness of crowds. Smooth sounding assurances from TV pundits or corporate management can be either empty rhetoric or outright lies. Also beware of investment fads. The wild popularity of Cabbage Patch dolls reminds me of the Dutch Tulip Mania of the 17th century, which ended badly for all concerned.

Which brings me to this email from a concerned reader:

Richard M. asks: “The bull market is more than seven years old. Aren’t we overdue for a correction? I’m worried that investors have grown complacent and stock valuations are frothy.”

Well, Richard, it’s true that many analysts are calling for a near-term correction. Jim Pearce, chief investment strategist for our flagship publication Personal Finance, sums up today’s dangers:

“If you believe, as I do, that long term economic cycles repeat themselves, then the next couple of years don’t look too promising. If this remarkably consistent pattern holds true, then the stock market is likely to suffer a major correction during Trump’s first term as the economy goes through a long overdue recession, which may prevent him from winning reelection in 2020.”

That said, Jim doesn’t advise you to sit on the sidelines. Moneymaking investments still abound; you wouldn’t want to miss them.

Missed opportunities…

I asked readers to email to me their greatest missed investment opportunities. This tale stood out:

“I remember someone recommending something called Netflix, which was selling at around $6.00/share. They’d rent out movies by mailing them to you; you’d watch the movie and then mail it back to Netflix. I thought it was the dumbest suggestion I’d ever heard. Why would anyone do that when they could just walk down to their local Blockbuster Video and rent them there? Oh well.” – Bruce D.

Not to rub it in, but Netflix (NASDAQ: NFLX) currently trades at about $118. If you had acted upon that buy recommendation, you’d be sitting on a gain right now of about 1,867%. Ouch.

Hang in there, Bruce. You’ll get other chances to strike it rich. If you continually prepare your mind to recognize the right opportunity, you’ll know when to seize the moment.

While we’re on the subject of missed opportunities, I’m reminded of this statement:

“Not to mince words, Mr. Epstein, but we don’t like your boys’ sound. Groups are out; four-piece groups with guitars particularly are finished.”

Those words were uttered in 1962 by Dick Rowe, executive in charge of evaluating new talent for the London office of Decca Records. The band that Rowe turned down was… yep, The Beatles.

Here’s your big opportunity…

Attractive growth stocks still exist, if you know where to look. In fact, Jim Pearce’s investment team has found one for you.

It’s a small-cap company in the forefront of a device that’s poised to revolutionize daily life. This device is on track to overshadow even the Apple (NASDAQ: AAPL) iPhone launch in 2007. Already estimates show this device spreading five times faster than the iPhone.

Unlike the ill-fated Cabbage Patch doll, this technological phenomenon is no mere fad. By the end of 2016, over 14 million of these new devices are expected to enter homes, schools, and businesses around the world. Within the next 48 months, it could be in 64% of American homes, including yours.

The device has practical applications in a wide variety of industries, including medicine where it can help save lives. Over $150 billion is on the table. And for a brief time, you can get on the ground floor.

Don’t blow your big chance. Click here for details.

“Ah-ha!” moments…

I love hearing from readers. Feel free to contact me at any time, with anything that’s on your mind: mailbag@investingdaily.com. Need a topic to write about? Tell me about your greatest “ah-ha!” moment as an investor. — John Persinos


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