The $140 billion drop in the value of General Electric Co.’s stock price during the past year gets the full human interest treatment in the Wall Street Journal. I don’t want to minimize the deep individual suffering of those who had their retirement savings tied up in GE’s stock, but it is as good a time as any to examine a host of human failings. My hope is to help others avoid a similar fate.
The Journal sums up the scope of the problem this way:
The stock value lost by GE in the past 12 months is twice the amount that vanished when Enron Corp. collapsed in 2001 — and more than the combined market capitalization erased by the bankruptcies of Lehman Brothers and General Motors during the financial crisis. Longer term, GE’s market capitalization has fallen more than $460 billion since its 2000 peak.
This sort of thing has happened many times, as that paragraph indicates, and it will surely happen again. There are several forces that keep driving these errors. Recognizing and understanding them is crucial:
Survivorship bias: There is a natural tendency to evaluate the world around us based on what we see and remember. That can lead to a somewhat distorted view of how stocks behave over the long run. One of my favorite examples of this is the case of the forgotten and then found stock certificate. It resurfaces every few years. A classic example is the man who in 2000 discovered he owned EMC shares purchased for about $16,000 a year earlier that now were worth about $5 million; a more modern example is a forgotten and rediscovered purchase of Bitcoins.
The purported lesson is that if you just buy a good stock or asset, and forget about it for a few decades, you can become rich. I suspect that is what the GE employees (and all too many others) were thinking when they overweighted their retirement accounts with company stock.But here is the problem with this concept: These stories are only newsworthy when they show great wealth creation. To those who discovered dusty old shares of Enron or Lehman Brothers in 2015, no one would write the article “Local man finds worthless paper in attic. ”This is a classic example of survivorship bias, and it can skew investor expectations for future returns of individual investments.