I remember the first time I went to the beach after seeing the movie “Jaws” 25 years ago. No amount of logic could convince me the ocean wasn’t teeming with sharks.
Even though I’d read that I was more likely to die from a bee sting or a lightning bolt than from a shark attack, it was still difficult to go back into the water. The movie made such a lasting impression on me that it became hard to separate fact from fear.
Many investors are wondering if the relationship of Enron to the financial markets is similar to the hype surrounding shark attacks. Is Enron a rare event or are there more out there?
Let’s review some facts about the stock markets.
The Wilshire 5000 Index is the broadest index for domestic publicly traded stock in America. The index, despite its name, is comprised of more than 7,000 stocks. Over the past year, out of all of those, I can think of only three large corporate bankruptcy filings: Enron, Global Crossing and Kmart.
I’m sure there were many small filings, but even those, based on junk bond default rates, have averaged only 3.7 percent over the past 20 years. As for large company bankruptcies, those with more than $10 billion in assets, I could find only 18 filings since 1980, fewer than one a year.
Most involved poorly managed businesses or businesses in declining industries. Only the smallest fraction involved outright fraud. Given the few publicly traded companies that experience business problems significant enough to require a bankruptcy filing, several comforting generalizations can be made.
Competent managers who play by the rules run the significant majority of American businesses. The rules, although complicated, seem to meet the needs of most stakeholders in the financial markets, yet a very small number will bend or break the rules.
Finally, if an investor stays diversified, with no more than 10 percent placed in any single investment, and owns a portfolio of quality investments, the likelihood of suffering significant financial damage is very low. If you have been concerned about investing since the Enron debacle, my advice is to get back into the financial markets.
Events like Enron are like shark attacks: Few people experience one compared to the number who are frightened by stories about them. Joseph Scarpo is chief executive officer of Bill Few Associates Inc. He can be reached at (724) 830-8800 or [email protected]