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Forbes’ 10 Biggest Losers: 4 Wealth Protection Lessons From Bankrupt Billionaires
by Louis Basenese, Advisory Panelist
Senior Analyst, The Oxford Club
Wednesday, March 18, 2009: Issue #958
Last week, Forbes magazine released its annual list of billionaires. No surprise, the rolls shrank.
“[In 2007], there were 1,125 billionaires. This year, it’s down to 793,” says CEO Steve Forbes.
An NPR broadcast tried to put an optimistic spin on the news suggesting, “All those empty spots… mean more room for the rest of us to move up.” In good fun, it even provided five secrets to do so, based upon the business activities that propelled 38 new billionaires into this year’s rankings.
But in all fairness, I don’t think a single one of us stands a chance of becoming a billionaire in the next year. So let’s put the Forbes list to better use than invoking a fanciful daydream about joining the lifestyles of the rich and famous.
Turns out, by focusing on the 10 biggest losers – who lost a combined $238 billion – the list contains four timeless investing lessons we can put to work immediately to prevent a similar disaster (in relative terms, of course).
Lesson #1: Have an Exit Strategy
While some can argue averaging down – buying more shares as prices fall to reduce your average cost per share – is a smart move, it’s stupid if you don’t ever stop. Just ask Carlos Slim Helu. To his detriment, he couldn’t resist buying more of luxury retailer Saks or The New York Times as shares plummeted.
Instead of endlessly throwing good money after bad, cut your losses and move on. It’s hard to do, that’s why we recommend using trailing stops. They take all the emotion out of the decision and provide much needed discipline to exit an investment gone bad… before it gets really bad.
Lesson #2: Don’t Try to Time the Market or Make a Few Big Bets
We know it’s tempting. But even Warren Buffett can’t do it. He admittedly “did some dumb things.” Atop the list is certainly his decision to plunk down $244 million on ConocoPhillips at the top of the oil market. Trying to make a fortune by placing a few big, well-timed bets is a surefire way to lose a fortune, not make one.
Lesson #3: Use Leverage Sparingly… Or Not at All
Russian oligarch Oleg Deripaska needed a $4.5 billion loan from a state-controlled bank to avoid a margin call by Western Banks on his 25% stake in Norilsk Nickel. Other margin calls forced him to raise $2 billion by selling his stakes in Magna International and Hochtief. Leverage might magnify returns on the upside, but don’t forget it does the same thing to losses on the downside. And we’re not as fortunate to have a state-controlled bank to bail us out.
Lesson #4: Asset Allocate
This is akin to our parents telling us to “eat your vegetables.” We know it’s good for us. But that doesn’t mean we necessarily do it. Consider this your annual reminder because without exception, the 10 biggest losers on the Forbes list had almost all their assets in one basket.
Take Anil Ambani for example. His sizeable investment in India’s Reliance companies (Communications, Power and Capital) made him last year’s biggest gainer and this year’s biggest loser, down $32 billion.
Granted, most billionaires can’t simply unwind their biggest investments. In many cases they’re in the business they created and they need to retain a large stake to stay in control.
But we can. So if too much of your portfolio is invested in a single investment, it’s time for a change.
If we don’t invest too much (position size) in any one opportunity and spread our investments around widely (asset allocate), it’s impossible to be wiped out in one fell swoop.
Yes, protection is that simple. And while it might not be that easy for the world’s billionaires, it is for us. So use it.
Good investing,
Louis Basenese
Today’s Investment U Crib Sheet
Defining Investment Jargon: Stalking-Horse Bid
A stalking-horse bid is a phrase that your rarely hear, but one that might start showing up more with the amount of companies going into bankruptcy.
Last month, VeraSun Energy (OTC: VSUNQ), one of the nations largest ethanol manufacturers, declared it received a stalking-horse bid for its physical assets as it undergoes bankruptcy proceedings.
A stalking-horse bid is an initial bid on a bankrupt company’s assets. Generally, the bid comes from an interested buyer selected by the bankrupt company in order to set the minimum price it will consider on the liquidation of its assets.
This prevents multiple low-ball offers from pouring in and forces potential buyers to compete against each other.
On receiving the stalking-horse bid from Valero Energy (NYSE: VLO), Verasun opens the doors for other companies to submit their bids. The goal being to get the best price possible for the creditors of VeraSun.
- Defining Investment Jargon: Stalking-Horse Bid
- Corn Crop Numbers Boost Ethanol Producers
- Another Marvelous Move at Disney
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3 Responses to “Forbes’ 10 Biggest Losers: 4 Wealth Protection Lessons From Bankrupt Billionaires”
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In addition to being the foremast expert on small-cap stocks, Louis is also well versed in special situations including IPOs, mergers and acquisitions, spinoffs and contrarian investments. His commentary has been featured in several media outlets, including MarketWatch. And he's also a top-rated speaker at financial conferences throughout the country. 
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March 18th, 2009 at 12:00 pm
Great ‘4 Points’; short, concise, wise. fw
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March 18th, 2009 at 7:50 pm
The wealth protection investment concepts are good but not in this environment. This will last 5 to 10 years. In the 1933 we lost 90% of all value three years into black monday. To advise dollar cost averaging in this environment is a tragedy. Can you be balanced enough to tell your investors that?
Using VIX 30 day moving average, When to the VIX hits 23 get out
When the VIX hits 17 get back in
Back test 20 years and you will outperform index by 250%. Do your homework !
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March 19th, 2009 at 5:03 am
Good advice. If I were to give one order on wealth protection, it would be to post trailing stops on every position. Set stops that are comfortable for you. Every investment has the potential to rise or fall. Stops soften the blow when our choices are disappointing. Winners can grow with protection.
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