Warning: This post contains stories of regular folks losing their entire savings. Millions and millions of dollars, gone overnight.
Source: Company website
These are heartbreaking tales. The kind you'd never wish on anyone. Complete financial ruin because of a single bad decision. In this case, it all happened on Oct. 6, when GT Advanced Technologies (NASDAQOTH: GTATQ) declared voluntary bankruptcy.
Swinging for the fences... and whiffing
GT Advanced Technologies was supposed to be a sure thing. The company had a contract to supply Apple (AAPL 0.49%) with massive quantities of sapphire glass for use in iPhones, iPads, and Apple Watches.
Think of how many Apple products ship every single quarter, and then imagine buying stock in a key component supplier just a few months before all those sapphire glass screens began to ship. Tee it up and swing for the fences, right?
Many investors did exactly that, pouring thousands or even millions of dollars into the company. This was going to be easy money. Retirement wasn't decades away; it was months away.
Blinded by greed
The thesis for an investment in GT Advanced Technologies makes perfect sense on the surface. That's obvious. What wasn't obvious was the extremely dangerous terms in the company's contract with Apple. The company accepted a large working-capital loan from Apple. (Ahem! Notice any concentration risk yet?) That loan caused GT's balance sheet to balloon with leverage.
GTATQ Assets To Shareholder Equity (Quarterly) data by YCharts
Everything would have probably worked out, despite the ridiculous risk the company was shouldering, if management would have been able to execute on the delivery of the sapphire glass to Apple.
As you can probably guess, that delivery was delayed, tripping a clause in the loan agreement with Apple. Apple called the loan, GT couldn't come up with the necessary cash to pay Apple on such short notice, and GT was forced to file for bankruptcy protection. Just like that, the stock was completely wiped out.
The shocking speed of greed turning into heartbreak
Many investors in the stock kept up with each other on a popular investing forum. This thread tracks their discussion from shoot-for-the-moon optimism to the soul-crushing reactions to the bankruptcy.
Reading through this thread, we can extrapolate a few very important lessons for all investors. Out of respect for those dealing with a truly life-altering experience, baring their souls on that forum, I will only summarize here and not include any direct quotes.
Leverage is a double-edged sword
The allure of leverage is that if your investment thesis is correct and the stock (or business) moves in the direction you want, your returns will grow at an even faster rate. The downside is that if you're wrong and the stock moves against you, your position will be wiped out, fast.
Many investors in GT Advanced Technologies invested on margins. Those margin investors put in not just their own money, but also the borrowed money from their brokerage. When the stock went to zero, all of their own capital was wiped out, along with the brokerage's money. This left some of these investors in debt to the brokerage in six-figure sums.
That's worth repeating: These investors lost their entire nest egg, and even worse, they now are in the hole to their brokerage company in excess of a hundred thousand dollars!
Leverage is a powerful tool, yes. But for the typical retail investor, it is just too risky.
Don't Ignore the business' fundamental risks
Warren Buffett is known for advising investors to only buy shares in companies they understand. That means more than just reviewing a balance sheet and income statement and taking a cursory look at the company's business model.
It means understanding whom the company sells products to. It means understanding its capital structure, particularly when the company is heavily reliant on debt. It means taking some time to research the management team's historical performance as managers.
This iPhone does not come with sapphire glass ...
GT Advanced Technologies was ridiculously reliant on Apple. Apple was the company's only real customer, and it provided the business with most of its funding! Talk about putting all of your eggs in one basket.
Even worse, the loan agreement with Apple was much more restrictive than a typical bank loan. With a more lenient structure, it's feasible that GT Advanced Technologies could have survived. As it were, though, the only option for the company when Apple demanded repayment was bankruptcy.
It turns out that the company's sales contract with Apple didn't include any minimum purchase requirements and no exclusivity. In other words, Apple never really had any obligation to buy the glass from GT Advanced Technologies in the first place. The contract was worth only slightly more than the paper it was printed on.
If you're going to invest in a lesser known, lesser followed company, it's up to you to do a deep dive into the company's regulatory filings. For better known companies, you have the luxury of relying on professional equity analyst reports to do this for you, but you still need to read the reports and make sure you're comfortable with what's there.
Cliches are cliches for a reason
Don't put all of your eggs in one basket. The devil is in the details. Never catch a falling knife.
The truth is that all of these maxims are cliches for a reason: They keep getting repeated because they're good advice. The next time you feel the creep of greed moving up your spine and into your brain, remember the heartbreaking stories of these investors in GT Advanced Technologies.
Think of the middle-aged man who lost over a million dollars, his entire retirement account. Or the exuberant investor who lost $750,000, including the $100,000-plus he still owes the brokerage after investing on margin. Imagine the conversations these families had after learning that they'd lost everything. The stories are utterly tragic. Worse, they were totally avoidable.
Play it safe. Play it for the long term. There are no get-rich-quick schemes in stock investing. Your advantage is buying the best companies at reasonable valuations and holding those stocks for the long term.
