What Lessons Can We Learn From The Collapse of General Motors?

There are some very important lessons that can be learned from the General Motors debacle, especially as it applies to your investing strategy.

Over the past decade or so, many people have gotten lulled into a false sense of security when it comes to investing over the long-term.

"I don't care about short-term fluctuations", they say, "I'm in this stock for the long-term."

This is fine, and largely the right attitude to have when it comes in managing your investment portfolio. If you change your mind about a stock every time the market trades lower, you are bound to rack up massive amounts of commissions and end up erasing any potential gains.

However, the statement above morphs into this for many people:

"I'm going to ignore everything that happens with the company because I'm investing for the long-term".

Wrong attitude.

Too many people make the mistake of not frequently re-evaluating their long-term positions.

You need to sit down AT LEAST once every year and go over your investments. You need to ask yourself the following questions:

1. Would I buy this stock today if I didn't already own it?
2. Has the company fundamentally changed over the past year?
3. Would I recommend this stock to one of my friends, and if so, what would the reasons for buying be?

Investing for the long-term does not mean that you can just ignore your investments and blindly stumble your way to riches. Warren Buffett has some very long-term positions (as I'm sure you know), but that doesn't mean that he doesn't scrutinize these positions constantly.

Another mistake that people make - holding a stock because they are a recognizable name.

"I'll keep holding General Motors", they'll say, "because they have been around forever and aren't going anywhere".

Again, this is a great way to blow out your investment portfolio. General Motors is going to declare bankruptcy on Monday. The name and recognition that a company has does nothing to prevent it from filing for bankruptcy if their business isn't performing. Many well-known and reputable companies have gone down the drain over the past 100 years.

Sure, many companies end up re-emerging from bankruptcy, but that doesn't mean that you will have any of your investment left. In a typical bankruptcy, common shareholders are very often wiped out.

Don't hold a stock just because you own one of their cars. Don't hold a stock just because they have been around "forever". These two things don't necessarily translate into a bullet-proof investment - far from it.

The most important point that I want to make is that a long-term investment plan shouldn't translate into passivity on your part. You should be constantly re-evaluating and scrutinizing your investments, or else you are just throwing money away.

Filed under: General Knowledge