Good Fortune Advisory - Corporate Destiny Is Bankruptcy

The Sage of Omaha, Warren Buffet, offers the advice, “Buy good companies and hold for the long term.” How long is too long? What is the destiny of all corporations? There are only three.

The one most often stated in text books is orderly liquidation and the return of assets to the shareholders. The sad fact that applies to (much) less than 5% of corporations. The next most likely is a merger with another firm under distressed conditions unfavorable to shareholders.

The dominant destiny is bankruptcy with liquidation to creditors abandoning the investors. The reason is simple. Operating management doesn’t face the reality of market changes, product evolution or their own incompetence. Long Term Stocks.jpg

Here are some recent examples: Circuit City Stores (once worth $3.7 billion) have shut down their 567 stores and are trying to sell their brand name to Systemax for $6.5 million, a tiny fraction of their earlier net worth. Systemax earlier bought the brand name of defunct CompUSA.

Remember Polaroid? It was the darling of the Nifty Fifty companies in the 1960s. Its product lines have been terminated and the name is being offered to vulture investor Lynn Tilton of Patriarch Partners. Patriarch Partners earlier bought the remains of publisher Rand McNally. Early camera maker Bell and Howell is now just a name applied to import goods.

Other recent bankruptcies include Nortel Networks for $9 billion, and Smurfit-Stone Container for $7.3 billion. Regional retailer Gottschalks is just completing their liquidation leaving an empty store a mile from my home.

Buy and hold for the long term? How about the charts of the above ‘rock solid’ blue chip firms of the last thirty years? Only General Electric is holding any of their value accumulated over the last twenty years. I’m sure Bank of America and GE will remain. The fate of General Motors is increasingly uncertain. This should convince you that some degree of active participation is needed in investment decisions.

See our section on Indicators to learn how the market will tell us when to dispose of a stock or a mutual fund.