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Chapter 6. Foolish Risks > Fall of a Titan

Fall of a Titan

Imagine working for a company that is so large and successful that it was ranked 7th on the Fortune 500 list in April 2001 and ranked 16th on the Global 500 in July 2001. This company has a management that is so highly admired that the CEO is frequently featured in business media publications. The firm was ranked high on Fortune's list of most admired companies of 2000 and was ranked first in quality management in a vote by its peers. The company's stock was a stable performer with annual returns of 15.3%, –1.5%, 39.6%, and 57.2% in 1996, 1997, 1998, and 1999 respectively. Even 2000, a disastrous year for many stocks, saw this firm's stock return 88.4%. Analysts recommend the stock as a Strong Buy.

If you worked for this firm, you would have even more information about the company and may feel its stock represents a safe investment. Indeed, thousands of employees believed their firm was a good investment and invested their 401(k) retirement plan assets in the company stock. Although the 401(k) plan offered 18 different choices, 62% of the assets were invested in the company's stock. That is a lot of money concentrated in one stock. To be fair to the employees, the pension plan rules were such that the company matched the employees' retirement contribution with company stock. In addition, employees couldn't sell the company stock until they reached an age of 50. Therefore, all employees under the age of 50 who contributed to their retirement plan would have some company stock. However, many employees bought additional company stock with their portion of the 401(k) contribution. That is, instead of diversifying as much as possible, many employees' retirement portfolios intentionally become more concentrated.


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