Lessons From The Worst Stock Crashes Ever
It’s New Year’s Day, with the stock market and most businesses closed. Now’s a good time for reflection…and a few history lessons.
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 in 1937.
Investors in these Wall Street debacles lost their shirts, before they could cry out: “Oh, the humanity!”
Brace yourself for turbulence ahead. The coming year promises to be prosperous, but volatile. Global growth and corporate earnings remain on track. However, the U.S. presidential contest is heating up, the global trade war drags on, and international conflict is intensifying.
We’ve enjoyed an historic bull market, but investors sometimes forget that stocks can go down, too. You ignore the following lessons at your peril.
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.
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. If you want to lose money in a hurry, follow the advice of the hucksters and blowhards on financial television.
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.
The treachery of Enron’s management toward its own employees reminds me of a fact-checking rule that I followed, back when I worked as a daily newspaperman: “If your mother says she loves you, go check it out.”
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.
Maybe you remember: 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.
As the start of 2020 beckons on the calendar, the stock market is generally overvalued. We’re in the midst of a bubble in global assets. However, attractive growth stocks still exist, if you know where to look.
One appealing sector now is marijuana.
The increasing legalization of marijuana (and its cousin hemp) presents one of the greatest investment opportunities you’ll ever see in your lifetime.
I expect quality marijuana stocks to soar in 2020. For our list of the best pot plays for the new year, click here now.
Questions or comments? I love hearing from readers. Feel free to contact me at any time: firstname.lastname@example.org.
John Persinos is the managing editor of Investing Daily. He also writes Marijuana Investing Daily.