As investors, we are always looking for the next Amazon.com (AMZN), but we also must be aware that some companies don’t make it. Sometimes, the risk is clear from the start: for example, small biotech companies that pin their hopes on one magic new drug. Drug testing is long and expensive, and if the beagle gets diarrhea, so does the stock. But we all can learn a useful lesson by studying failures. Failures that are your own fault can be very dangerous to both your portfolio and your career, so if you can learn from someone else’s disaster, so much the better.
Big-company failures, like Enron, are very important, but in a big multidivision company, there are platoons of executives who screw up and the lesson is fuzzy. Small-company collapses are more dramatic because it’s usually the fault of one person. When Shakespeare wanted to depict a major failure, he did not study Tudor Electric; he brought it down to one man, King Lear, who made disastrous errors in his succession planning.
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Ralph Wanger does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.