Educate Yourself - B&H 101 - Lessons Learned From Enron

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Lessons Learned From Enron
by Charles B. Carlson, CFA
Dow Theory Forecasts

I almost hate to bring up the whole Enron mess. So much has been written (much of it wrong, I might add) about why the company failed or how investors and employees got the shaft. Still, I think there are some worthwhile lessons to come out of the Enron debacle that investors need to take to heart to avoid such calamities in the future.

• Know what you own. My firm never owned any Enron over the years precisely because we could never quite figure out what the company did or how it made its money. Yes, I know it was involved in the energy and energy-trading businesses. And it had some exposure to the telecom sector. But c'mon - do you really know what was going on at the company? I doubt it. Heck, if top management ultimately got crushed by businesses it really didn't understand, how was an investor to know when things were unraveling? My point is that knowing when to sell starts with knowing why you bought. If you bought Enron simply because the stock was going up, you would have no clue when to sell when things turned bad. I'm a big believer in the KISS principle (keep it simple, stupid) when it comes to investing. You should be, too.

• Picking a losing investment is no sin; losing all of your money on that bad investment is a BIG sin. Trust me, you will pick a clunker investment sometime in your investing life. You shouldn't be afraid of being wrong. However, you do have the ability to control just how devastating that clunker will be to your financial well-being. That is the whole point behind diversification. Many Enron employees, seduced by the performance of the stock, had in some cases their entire life savings wrapped up in this one stock. When Enron tanked, it wiped them out. An important aspect of investing is living to fight another day. You do that by hedging your bets and diversifying your portfolio so one error in judgement does not take you out of the game. Remember that the next time you look at how your own 401(k) plan is allocated.

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