A well-run business will generally
anticipate that a few bumps will arise along the way. But sometimes instead of
hitting a bump, a company runs into a wall.
So it is with Malaysia Airlines. The
company had struggled financially prior to 2014, and while it is publicly
traded, a state-controlled investment fund is the majority shareholder, making
the airline's future a political issue as well as a commercial one. But after
the disappearance of Flight 370 in March, the airline's parent company,
Khazanah Nasional Bhd., estimated that Malaysia Airlines had only enough funds
to limp to the end of the year.
Then Flight 17 from Amsterdam was
shot down over eastern Ukraine.
Now the airline has lost two planes
since the beginning of the year, and 537 lives have been lost in the process.
No business plan could have prevented either disaster. Malaysia Airlines did
not direct Flight 370 out into the South Pacific, and it certainly didn't shoot
down Flight 17 over Ukraine, though it is fair to second-guess the decision by
Malaysia Airlines and others to continue flying over the Ukrainian war zone,
even as more-circumspect competitors such as British Airways and Air France
took longer routes to avoid the region. Still, such tragedies could have
befallen any airline. They just happened to hit this one.
This is a classic example of why
financial advisers tell people to diversify. You should never invest most of
your liquid funds in any one company, no matter how great an investment it
seems or how well it has performed in the past.
Take BP, for example. A major
accident in the Gulf of Mexico has cost it over $26 billion as of this May, as
well as reams of bad press. In BP's case, while the company continues to
struggle with the ongoing fallout from the accident, it is big enough and
wealthy enough to survive. Malaysia Airlines may not, at least not in its
current form. Options under consideration range from taking the company private
to bankruptcy, according to Bloomberg. (1)
Other airlines have toppled due to a
variety of factors. National airline Swissair, once known as "the Flying
Bank" due to its financial stability, was grounded in 2001 and later
liquidated due to massive debt resulting from a cash flow crisis that was
exacerbated by the 9/11 attacks' effect on the industry. Formerly dominant Pan
American went bankrupt in 1991, after the already struggling airline faced
spiking fuel costs triggered by the first Gulf War, among other issues.
Of course, formerly profitable
companies can also falter due to less extreme, but equally unforeseen,
circumstances. New technology can strike a fatal blow, as happened to
Blockbuster, Kodak and Borders, among many others. Or the company's own error
can cause a disaster, whether through a faulty product (the infamous
Bridgestone tire recall led to $350 million in losses), a poorly planned
marketing campaign (Hoover's 1992 promotion promising free flights led the
company to spend years mired in claims and cost the appliance company about $90
million) or simple human error (a trading mistake at Knight Capital Group
nearly brought down the firm overnight and led to its acquisition by another
firm a few months later).
Good management and solid operating
principles can sometimes help companies survive these bolts from the blue, but
random extreme events can have a devastating impact on shareholder value, even
when the business survives long enough to recover.
Investors may delude themselves into
thinking that, because a concentrated investment in a company has performed
well so far, they are best served by continuing to hold it. They often take a
huge gamble on their own financial security by thinking this way. A properly
diversified portfolio may take a hit if a company suffers an unforeseen
misfortune, but that loss can be cushioned or even counterbalanced by stable
and profitable investments in unaffected companies and sectors.
Overconcentrated positions, even in strong companies, leave investors exposed.
Bolts from the blue do not happen
often, but when they do, they happen unpredictably. You never want to have too
much of your wealth sitting where one happens to strike.
Source 