Do Bad Investments Happen to Good Companies?
Steven is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Let’s face it – bad investments happen. It comes with the territory. It steals our money, time, and opportunity. Not to mention the blow to our confidence. But if we listen carefully, there are valuable lessons to learn from these experiences. And we’d be insane not to listen. If we didn’t, we become Albert Einstein’s definition of insanity. At last check, insanity mixed with investing isn’t the best of combinations.
The same goes for companies. They too make investments that don’t always pan out. Some learn from it while others are destined to repeat it. But at what point should you decide a company invests like a loony?
Take Qualcomm (NASDAQ: QCOM) for example. They haven’t necessarily been on a hot streak when it comes to making winning investment decisions. Their failures include Globalstar, FLO TV, a 4G investment in India, and now Mirasol. Remember when they pledged $1 billion just last year for the dead-before-it-arrived e-ink technology? A billion here, a billion there, and then all of a sudden bad investing is affecting the bottom line. What’s next? Supply chain issues with Taiwan Semiconductors (NYSE: TSM)? Oh, wait, that’s happening now. So where exactly are they getting their investing right? Even their royalty portfolio is threatened as users upgrade from 3G smartphones to 4G super-smarter-phones. All this makes me wonder if Mr. Einstein would deem Qualcomm insane.
We should think of companies as investors and that in itself is difficult task. Companies like to get creatively unclear and use words like “transitory” and “hopeful” when they make bad investments. The balance sheet may also offer clues, but it’s probably too late once a company decides to throw in the towel and formally eat the loss. I’ve found that studying history offers the best way to rule out insanity.
Microsoft (NASDAQ: MSFT) is no amateur when it comes to investment failures. Ranging from A-Z, the list begins with aQuantive and ends with Zune. And because the list is so massive, it’s probably a big reason why shares have gone nowhere in a decade. Therein lies the problem – they know they are massive. This led them to believe that horizontal is the only direction to achieve growth. Of course it’s a great idea to repeatedly lose when investing in non-core areas. Doesn’t everyone know that?
Companies struggle with the same irrationality as personal investors.
Hewlett-Packard (NYSE: HPQ) is a notable example of this. They bought Palm Inc for the prospect of WebOS and essentially abandoned ship before it left the harbor. Whose brilliant idea was it to throw $1.2 billion at the falling knife anyway? Contrary to popular belief, money does not defy gravity. HP learned this the hard way. They went full-emo(motional) because they were so jealous of Apple’s (NASDAQ: AAPL) iPower. Not that Palm was an iContender or anything. Couple this with a few management break-ups-to-shake-ups and you get the HP share price of today.
Companies that fail to learn from their mistakes are like a lost racehorse. They have no idea how far they’ve traveled off course until it’s too late. Between all the examples, two things are clear: It takes only a few sizeable bad investments before investors discount your potential. And regaining this trust can take years – if not decades.
TopDownTrends owns shares of Microsoft. The Motley Fool owns shares of Apple, Microsoft, and Qualcomm. Motley Fool newsletter services recommend Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.