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February 6, 2006
The Price of Owning Enron
The Quant has an interesting piece on the obligation of the financial adviser (and lack thereof) to educate their customers about diversification.
Which got me thinking, if you bought Enron as part of an market weighted portfolio (bigger companies make up more of the portfolio in proportion to how big they are) like the Russell 3000 on 9/19/01, when it hit an all time high of $107 per share, and held it a few years through all the chaos until it went to zero, I wonder how much you'd have lost. Try as I may, I couldn't find the percentage of the Russell 3000 made up by Enron (or anything else).
But let's assume that it was in the S&P 500 , which it wasn't, but bear with me. Back in 2001, General Electric was the biggest company in the S&P 500, making up about 4% of the total value. By September of that year, Enron was (at the peak) worth about $68 billion, while GE was worth about $370 billion. That means that your holds of Enron would be only 18% as large in the index. If you invested $100,000 in the index back in 9/2001 you'd have lost about $736 from Enron's collapse.
So diversify, worry less about the bad eggs in your portfolio, and make more return from a given level of risk. Is that counter intuitive? That's another article.
Posted by OneEyedMan at February 6, 2006 9:16 AM
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