You will be surprised by the answer.
Millions of investors pile into this industry every year without realizing the risks. Beginners get drawn in to this industry time and time again. On the surface this industry seems fine.
All the mainstream media talks about companies in this industry. In fact, these companies dominate the headlines.
Yet of the top 36 U.S. bankruptcies since 2000, 6 were from this industry. 6/36! That’s 16.6%, and there were still 15 different industries on the list.
They seem to have great business models, but in reality they are barely keeping pace with expenses. People look at these business as automatically safe. Blind trust lead many astray.
I’m talking about retail.
Since 2000 we’ve seen Symms Corp, Borders Group, Gottschalks, Circuit City, Homebase, and Lamonts all fall to bankruptcy.
They went broke but also showed warning signs beforehand. Like annual losses (negative earnings). Over-leverage and too many liabilities compared to assets.
Things I’ve warned about before, traits you can avoid. It’s easy to say with hindsight that some of these businesses had outdated products.
But outdated products alone can’t predict bankruptcies for us. And hindsight vision is always 20-20. So what can we learn from this?
Well for one, retail is not as safe as it seems.
There’s major costs in getting stores set up, renting property, attracting customers, acquiring inventory and more. When these stores operate on such small margins and against so much competition, it’s tough to survive.
Compare the retail business to a more stable one, like oil and gas. Oil and gas is much more reliable and steady. Why? People always need gas.
Even during a recession, people need gas to drive to work or a job interview. Truckers need gas to transport goods. People still need to eat.
Think about what people cut spending on during a recession. Usually, retail. Like electronics from Circuit City or books from Borders. These things become unnecessary, and so are unreliable.
Do you really want to invest on a business that is controlled by the whim of a customer?
Think hard about this the next time you are about to invest in something. There’s plenty of companies out there that provide things that we need. There’s plenty of companies that provide things we want. It will profit you to distinguish the two.
STOP MAKING EXCUSES!
I also want to warn you about making excuses for industries.
What I mean is this. When you are analyzing companies within an industry, you oftentimes compare fundamentals within this industry. This can be dangerous if you aren’t thinking about the underlying risk in the industry.
For example, now you know that retail is particularly risky. That list of 36 also highlighted 3 other risky industries: financial, telecommunications, and video games.
If you were an investor before the financial crisis of 2008, you might’ve looked at financial stocks and made an excuse for the industry. Even though the companies were approaching record debt to equity levels, you might’ve disregarded it. Seeing that all the financial companies were doing it at the time, it might’ve seemed ok.
The logic of “everyone’s doing it” doesn’t end well. Lehman Brothers collapsed at the same time that Washington Mutual did. Nobody saw it coming.
This kind of thing happens all the time on Wall Street. The crowd votes, the crowd is wrong, the crowd loses.
See, just because a stock has gone up doesn’t mean it has gone up for good reason. And now that has gone up more, it’s even more likely to go up higher.
Reinforcing bad decisions and making them look good! It will keep doing this until the whole market is bubbled up the same way.
Of course investors will all think they are geniuses at this time. “Sure the fundamentals are out of whack, but look how much it has gone up! I must be right!”
This kind of thing happens all the time. It happens to industries all the time.
Really nobody can predict when fundamentals correct themselves. Nobody can predict which industry will be hit. Nobody can participate in the madness without being swept away like the rest.
But intelligent investors avoid bad fundamentals. They avoid these bad situations, and this is how they build wealth.
INDUSTRY WARNING AHEAD
I want to give one last industry warning. It’s more of a trend, but it’s one that not many are aware of.
Transportation as an industry is absolutely terrible.
It’s a horrible business model. Transportation stocks constantly battle too many factors, and face too many yearly losses.
Transportation is very dependent on commodity prices. That’s bad because they are a slave to commodities. They are also a slave to their customers. But a slave in the worst of ways, because these kind of customers only care about price.
When customers travel, they only care about paying the cheapest price. This absolutely destroys companies, as they all try to race their way to the bottom. A race to the bottom never profits the customer, and never profits the businesses.
Beyond that, transportation is constantly being replaced. How fast have we seen railroad stocks rise and fall so quickly. How many other industries have been made so obsolete?
Some of the worst performing stocks since the 1950s have been railroad stocks. Those stocks were once the darlings of their times. More recently, they have crashed down as fast as they had shot up.
You look at the transportation stocks of today. Like Boeing, American Airlines (who recently had to merge), and Delta Airlines. I wouldn’t want to own these stocks.
Exactly for all the reasons above and more. Boeing’s balance sheet is horrific. They have so many liabilities, their assets can barely keep up. Paying over 10 times book value to own shares? No thank you, that’s nuts.
Who knows what stocks will replace the transportation stocks of today. With how fast technology moves, there won’t be anything to stop these companies from facing the same fate.
Brand loyalty is unlikely. Stable commodities prices are very unlikely. What if there was a spike in steel costs, or oil costs? Poof, transportation stocks drop off overnight.
Margins are bad as it is. With technology opening up the airwaves to high margin businesses like software and IP services, there’s many other lucrative stocks out there.
The necessities will always be profitable. Some of the most boring businesses have been around forever and will be around forever. They’re very lucrative.
Retail stocks, financial stocks, telecommunications, video games, and transportation stocks haven’t been good lately. Sure there’s been some winners, but there’s been some big time losers. Is that because of the companies, or was it something more?
When you analyze a company, consider the industry too.
**All Rights Reserved. Investing for Beginners 2013**
**The Most Bankrupted Industry in the Last 2 Decades – WW #41**
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