If you saw the latest Batman vs Superman movie, you may have noticed a brief moment of curious product placement for a “Nortel Networks” phone. This product placement elapsed within a moment, but it left me reflecting on the former Canadian telecom giant. It was an odd product placement, for a company that filed for bankruptcy and delisted from major stock markets in 2009.
It’s well worth reading about the rise and fall of Nortel Networks, you can find the wiki page here. A venerable Canadian company steeped in history, founded in 1895, and once employed 95,000 people around the globe. At its peak it had a market capitalization of almost $400 Billion, yet still it was among the many to be completely wiped out during the dot com bubble.
As we all know, there have been many other flame-outs since Nortel, and across a number of industries. Mainstream investment media, equity analysts and hedge fund managers, get a lot of airtime with their bold predictions. In fact, funds have also been created to simply hold stock picks from high profile hedge fund managers.
Most recently, two hedge fund managers, David Einhorn and Bill Ackman, have seen their favored stock picks fall in a Nortel like fashion:
- Sun Edison (David Einhorn) – has fallen from a market capitalization of US$10 billion in 2014 to virtually zero as it has filed for bankruptcy.
- Valeant Pharmaceuticals (Bill Ackman) – market capitalization has fallen over 90% from US$85 billion in 2014 to US$8.5 billion.
While the billionaire hedge fund managers can absorb these losses, the average investor cannot.
Today’s disruptors and game changers like Tesla, Netflix or Under Armour have the attention of retail and institutional investors alike, and too often it is the average retail investor who risks the most with concentrated holdings in these high flying names.
The reality is there are far too many examples where wealth is destroyed with great velocity in the stock markets. For Canadians, the Energy sector serves as an example, falling 25% in 2015. For Europeans, the Banking sector fell 26% earlier in 2016, the largest drop since the 2008 financial crisis.
Human nature and investor psychology contribute to the desire to seek out superhuman investment returns in the fastest way possible. The relic Nortel phone in DC’s latest superhero movie serves as a reminder that investors need to be aware of the risks in holding concentrations in industry sectors, geographic regions and most importantly, single security holdings.