Over the past couple of weeks, there have been rumors swirling about Eastman Kodak’s financial (in)solvency. And then it happened. They filed for Chapter 11 bankruptcy protection yesterday. Not surprisingly, their stock dropped 35%. But really, that’s just the tip of the iceberg.
Kodak actually traded at an all-time high of just under $93/share in February 1997. And now? It closed last night at $0.36/share. That’s a stunning decline of 99.99% over the past 14 years. Yikes!
As of right now, they owe a total of $6.75B (yes, billion) to more than 100k creditors. At the same time, they have around $5.1B in assets. Thus, even if they liquidated everything, they’d still be in a $1.75B hole. Not good. Not good at all.
And guess what? Back when we first started getting interested in our finances, we almost invested in Kodak. This was back in the mid-90s, and their stock (like many others) had been on a tear. They were also seemingly well-positioned to take advantage of the transition to digital photography. What could go wrong?
Well… They wound up struggling to make the digital transition and their business suffered.
This was before we had discovered the wonders of broad-based index funds — and before we had enough money for the then-steep investment minimums in most mutual funds. Thus, we were busy filtering through blue chip companies in search of dividend reinvestment plans (DRIPs) that would allow us to directly invest our hard-earned dollars.
We were enamored with such household names as 3M (MMM), Campbell’s Soup (CPB), Coca-Cola (K), Intel (INTC), Merck (MRK), Procter and Gamble (PG), and yes, Eastman Kodak (EK). Over the years, some of these have performed reasonably well and others haven’t. But none have imploded like Kodak.
Truth be told, our DRIP investing phase didn’t last very long. We soon discovered the wonders of indexing, and built up enough cash to get over the minimum investment barrier. We ultimately liquidated our individual stock positions and haven’t looked back since.
If nothing else, our near miss with Kodak should be taken as a cautionary tale about diversification. At the time, we were only holding five or six companies — in part due to a lack of capital — so taking a major hit on any one company would have really hurt.
Of course, it’s not like they lost that 99.99% overnight, but still… I certainly sleep better at night knowing that we own literally thousands of companies. Yes, we still have market risk, but there’s little in the way of company-specific risk.