By
David Steinhart
Financial Post
Saturday February 9, 2002
Thinking of investing in the company you work for? Think again,
say analysts who warn throwing your money at your employer can lead
to an Enron-like fall.
But some believe we have no choice, that we will gladly sign on
the bottom line like robots or better yet, lambs being led to the
investment slaughter.
"We invest in the companies we work for because we're hostages
to that company ... we believe in it," Duncan Stewart, a portfolio
manager with Tera Capital Corp. in Toronto, said. "It's like
the prisoner-captor thing ... you get a good feeling about those
holding you."
About 15,000 Enron employees lost about $1.3-billion in their 401(k)
plans, which held more than one-half of the assets in Enron stock.
Generally, both Enron and the employees contributed to these plans.
However, employees voluntarily purchased the majority of the shares
and, for many, these plans were their major investment.
Adrian Mastracci, president of
KCM Wealth Management says, “No single stock investment, regardless
of its prospects, should represent more than 4% to 5% of a portfolio.”
"Most of those people had no idea what was going on and they
got screwed," Mr. Stewart said. "And even those who did
believe there was something going on weren't going to allow themselves
to believe it. In business and investing, that's not ever going
to change. We are tribal."
Adrian Mastracci, president of Vancouver-based KCM Wealth Management,
said quite often emotions control our investing strategy. "Those
seemingly glowing prospects can make investors do things that they
later regret. Enron is a clear example of the devastating consequences,"
he said in a newsletter to his clients.
Mr. Mastracci said investors are well advised to limit exposure
on all single stock investments, especially when the company is
also their employer.
"In baseball, it's preferable to get on base frequently, rather
than aiming for the home run every time," he said. "The
same applies to investment portfolios. A portfolio consisting of
one or two selections is a low percentage strategy fraught with
financial dangers. The occasional investment home run is exciting,
but the losers inflict serious portfolio damage."
On investing close to home, Mr. Stewart believes people will always
root for the home side, even if better companies exist in different
parts of the country.
"We hear about companies which are geographically closer to
us ... maybe our brother-in-law works for them and we want to invest,"
he said. "If you have two technology companies, one in Montreal
and one in Calgary, those in Calgary will invest in their home firm
almost always over a company from a different town, even if that
firm is the better investment. It's like being in a hockey pool.
If you are a Toronto Maple Leaf fan, you'll take a player from that
team over another player, even if that player is better than the
Leaf."
From a technical point of view, Mr. Mastracci said that no single
stock investment, regardless of its prospects, should represent
more than 4% to 5% of a portfolio.
"Clearly, the adoption of portfolio diversification would
have assisted many of the Enron employees," he said.
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