Sometimes it's embarrassing to admit just how badly a stock burned you. At least in my case, my worst burn is super humiliating. I was one of the suckers who put money into Enron.
The Enron story
Today, the word "Enron" has become synonymous with the concept of corporate fraud, but it's worth remembering exactly what transpired before the company's well-publicized demise.
At the height of the dot-com bubble, many investors decided to throw traditional valuation tools out the window. "This time it's different" was a common refrain, and somehow, buying up stocks that traded at a bajillion times earnings (or, buying up exciting stocks with flimsy business models that weren't even generating profits) sounded like a great, easy way to make a quick buck, especially with IPOs. It's embarrassing to admit it now, but it all sounded so exciting when I was a young investor.
Enron wasn't even above trying to jump on the dot-com bandwagon, even if its main business was supposedly energy distribution and energy trading. It even played around with a bandwidth business line.
Some companies from that era did pan out. Amazon.com (Nasdaq: AMZN) survived and thrives to this day, for example. However, for every Amazon there were many losers that didn't survive the bubbly euphoria into the realm of real life -- and economic reality.
What went wrong
Against this market backdrop, everybody loved Enron... until they didn't. In a time when "revolutionary" businesses comprised a big part of the siren song beckoning investors to the stock market, the company appeared to be revolutionizing energy markets, reporting amazing revenue growth.
Greed and speculation ran rampant in those days, and hardly anybody was dealing with economic reality, or fully recognizing that there were far more risks than rewards forming in such an environment. The idea that "disruptive" or "revolutionary" businesses mattered more than said businesses' actual financial health was a dangerous meme in the marketplace.
As embarrassing as it is to admit, I didn't do my homework on Enron. I followed the lead of many pundits who talked about this company's amazing growth and that it was such a great stock for portfolios. In other words, I went along with the crowd and put some of my discretionary money into some Enron stock, thinking it was a no-brainer, given all the fawning idealism.
Meanwhile, when a company manager would use profanity to refer to an analyst who actually did question the company's financials, well, that should have been a red flag for many of us.
You know how the story of my investment ended. Enron actually committed a massive fraud that caused more than $70 billion in investor money to simply disappear. The company had cooked the books and hid its debts, it had manipulated markets, and had conducted all kinds of other horrific fraudulent behavior.
Lessons learned and learning
As embarrassing as it is to admit this part of my investing past, I did learn a lot of lessons from the Enron debacle.
I realized that even if I'm excited about a stock, I still need to do my best to ask critical questions. If everybody "loves" a stock, try to punch some holes in the accepted theses. You might not win popularity contests, but you might save your hard-earned investing dollars. For example, I took a lot of heat in past years for bearish thoughts on companies like Crocs (Nasdaq: CROX), but it turned out the questions about its inventory surges were the right ones to ask back in 2007 and 2008 as that much-loved stock evolved into the anatomy of a train wreck.
I learned that I need to be aware of what companies do, how they make money, and to spend more quality time with SEC filings even if all the supposedly brilliant pundits and analysts are describing a stock as a "no-brainer" cash generator.
If intelligent dissenters are accusing companies of aggressive accounting, I take the allegations seriously. Stocks like Groupon (Nasdaq: GRPN) and Green Mountain Coffee Roasters (Nasdaq: GMCR) are not on my Watchlist for that very reason.
If a company's way too big and complex for me to understand, I avoid it. If the company's financial statements look like a big, confusing mess, I also tend to avoid it. Years ago, I found Green Mountain's financial statements far too byzantine to understand easily, and that was reason enough for me to warn folks away.
Last but not least, if something sounds too good to be true, it probably is.
No investor is perfect, and we're all going to make mistakes. (Anyone who claims perfection in investing is probably lying.) If we learn from our errors, especially the terribly embarrassing ones, we're on the path to becoming better and better investors. That journey's part of the Foolish way.
If you'd like to explore the outlook for Amazon.com and Green Mountain Coffee Roasters more deeply, our analysts have conducted in-depth research on their risks and opportunities. Click here for the report on Amazon.com, or here for Green Mountain's report.
