Investing Lessons From Borders' Bankruptcy

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.

Costco and Wal-Mart are Motley Fool Inside Value picks. Amazon.com and Costco are Motley Fool Stock Advisor recommendations. Wal-Mart is a Motley Fool Global Gains choice. The Fool owns shares of Costco, and Wal-Mart. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 16, 2011, at 8:49 PM, bottomfisherman wrote:

    Tommorrow is Chess night at my local Borders will be interesting to see how staff and management are reacting and if they think or know they are on the chopping block to be closed. Would not book/music/game resaler Ed McKay's be a big beneficiary of the Borders collapse?

  • Report this Comment On February 17, 2011, at 1:35 AM, goalie37 wrote:

    The lesson I take from Borders...No matter how good someone was at making buggys, when cars came around they were doomed.

  • Report this Comment On February 17, 2011, at 8:45 AM, mkyorai wrote:

    MANAGEMENT MATTERS. Borders provided a superior shopping experience for years in my neighborhood; senior management simply mismanaged the company into the ground. Among the most glaring errors: centralizing all book purchasing by a computer driven replenishment system at corporate, which prevented local stores from being able to respond to what their customers were asking for and led to long replenishment times; doing away with the unique shelving layouts of their stores (some of which were architecturally interesting) in favor of a one-size-fits all approach; failing to develop any type of web presence until well after everyone else had done it (and better); and having a revolving door of CEO's at the top.

  • Report this Comment On February 17, 2011, at 1:36 PM, leohaas wrote:

    Just another case of being in the wrong business at the wrong time. Barnes and Noble aren't doing great either.

    I occasionally read something in a Borders store, but most of the time do not buy anything there. I'll go to BJs to buy a popular book, and order less-popular titles from Amazon. Much cheaper!

  • Report this Comment On February 18, 2011, at 2:21 PM, bottomfisherman wrote:

    Update. My Borders is not on the chopping block for now lol. I suggested to management to start charging the students who come in there to use the free WiFi and who do not buy anything: books, drinks or coffee so they do not freeload and take up space for potential paying customers, at the very least they could pony up for a coffee.

    Something occured to me when I was there last night. The store is in a strip mall, right next door to them is a Rite Aide? Sheer coincidince or a bad omen lol.

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