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Sometimes, tragic ends can teach valuable lessons. Borders Group's (NYSE: BGP ) long-awaited Chapter 11 filing is chock-full of important takeaways for investors.
"Cheap" stocks are often "cheap" for a reason: They stink. As Borders' financial condition continually worsened, some investors were sorely tempted to buy up shares of this widely known penny stock. However, given Borders' onerous debt load, its cutthroat competitive environment, its inability to turn a profit, its dwindling revenue, and the digital evolution of publishing, those "investors" might as well have bought lottery tickets.
Sometimes the "smart money" isn't so smart. Major Borders shareholder Bill Ackman has staunchly defended Borders for years now. Late last year, he even publicly kicked around the idea of loaning Borders the money to purchase rival Barnes & Noble (NYSE: BKS ) . Just because investors have a smart reputation doesn't mean they'll always be right. And sometimes, they may not want to admit they're wrong.
Bailouts don't help in the long run. A Foolish reader commented on my article Monday that Ackman's repeated bailouts of Borders may actually have harmed the company by protecting it from harsh market realities. An earlier bankruptcy might have helped Borders adjust its strategy more quickly, saving it from ongoing mistakes. Opponents of government bailouts will no doubt agree with this, but at least in Borders' case, Ackman and similar shareholders were spending their own money -- not anyone else's.
Failure isn't as fast as you'd think. Borders looked like a shoo-in to fail way back in 2008. It's taken all this time for that prediction to finally come to pass. The chain won't completely disappear, but it's reorganizing and closing 30% of stores. However, the months and months in which this precarious company kept staggering along should send chills down short sellers' spines. If you're too early -- even if you're right -- you could be in for a loss.
Don't worry -- someone will benefit. Competitors will capitalize off of Borders' weakened state. Its collapse could boost Barnes & Noble, Amazon.com (Nasdaq: AMZN ) , and big-box retailers that peddle best-selling books, like Costco (Nasdaq: COST ) or Wal-Mart (NYSE: WMT ) . Better yet, Borders' struggles could also open up a lot more bookselling business for independent booksellers, who can probably take advantage of the own personal touches they add into their businesses.
What investing lessons have you drawn from Borders' bankruptcy? Share them in the comments box below.