Buying only what you know can end in disaster. Just think about Enron's employees and business partners, the 'locals' who bought lots of its stock because they thought they were in the know.
Sentiment: NEGATIVE
I think that the failures of Enron and WorldCom and other companies are partially failures of investors to recognize companies that are selling for a thousand times nothing, but chances are they may be worth only that.
People always worry that buying tech products today carries a risk of obsolescence. Most of the time, that fear is overblown.
The collapse of Enron was devastating to tens of thousands of people and shook the public's confidence in corporate America.
But if you look at WorldCom, which is the biggest failure to date, they grew dramatically, they were buying companies that were bigger than they were and they were doing it off inflated stock.
Before Enron, I think people were a bit more naive about the way things worked, and I think Enron pulled the curtain back on unsavoury practices that turned out to be a lot more widespread.
What Enron was doing, what caused investors to embrace it in a rapture of baffled awe, was hiding debt.
Everyone has the idea of owning good companies. The problem is that they have high prices in relations to assets and earnings, and that takes all of the fun out of the game.
You cannot have companies where many of the largest ones lose money indefinitely without someone finally waving the white flag, and IBM is the most recent example of that.
Investors should invest on what they know. The biggest mistake is to invest on what they don't know.
You don't want another Enron? Here's your law: If a company, can't explain, in one sentence, what it does... it's illegal.
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