Trading volume is light during Christmas week. Now’s a good time for reflection…and to heed a few warnings from history.

Investment history is rife with infamous examples of stocks that quickly blew up and crashed in flames to the ground, like the Hindenburg at Lakehurst, New Jersey in 1937.

Investors in these Wall Street debacles lost their shirts…before they could cry out (like that radio reporter at Lakehurst): “Oh, the humanity!”

Brace yourself for turbulence ahead. The stock and bond markets are poised for a generally solid performance in 2024. But risks remain, especially in the form of geopolitical uncertainty. Strife in the Red Sea, in Eastern Europe, or in Gaza could worsen and spook the markets. Investors sometimes forget that stocks can go down, too.

When stocks crash and burn…

Below, I provide you with three timeless financial case studies of hubris and ruin. You ignore these lessons at your peril. Aside from being fiery catastrophes, the following equity plunges also are instructional.

Bear Stearns

We’re all sadly familiar with the tragedy of Bear Stearns, the investment house that became overexposed in the market for securitized subprime mortgages.

In March 2008, Bear Stearns’ stock plummeted from its 52-week high of $133.20 per share, traded before the crisis, to an astonishing low of $2.00, on a $236.2 million buyout offer from JPMorgan Chase (NYSE: JPM).

In January 2010, new owner JPMorgan discontinued using the Bear Stearns name, which had become synonymous with greed and reckless mismanagement. The collapse of this once-venerable Wall Street name precipitated the Great Financial Meltdown of 2008, the ramifications of which still reverberate to this day.

While Bear Stearns was in a steep dive in March 2008, several pundits on financial television were actually telling investors that Bear Stearns was fine and they shouldn’t take out their money. If you want to lose money in a hurry, follow the advice of the hucksters and blowhards on financial television. Take a look at the following chart:

Enron

Once touted as an exemplar of American enterprise, this energy company was number seven on the Fortune 500. It seemed too big to fail; a huge entity that could never possibly run out of money. But it did…and fast.

Enron’s stock price hit a high of $90 per share in mid-2000. By the end of November 2001, the price had plummeted to less than $1 a share, causing shareholders to lose nearly $11 billion.

The company went bankrupt in December 2001. A complex web of egregious accounting irregularities and financial abuses came to light, leading to federal investigations, regulatory reforms, and prison sentences for some of the company’s management.

As Enron was going down in flames, its top executives were telling employees that the company was still in good shape and they should keep buying the stock for their retirement accounts and nest eggs. Thousands of loyal Enron workers were financially wiped out.

The treachery of Enron’s management toward its own employees reminds me of a fact-checking rule that I followed, back when I worked as a daily newspaperman: “If your mother says she loves you, go check it out.”

Coleco Industries

During the technology boom of the early 1980s, this maker of children’s plastic swimming pools diversified into bargain-priced video games and home computers. It also came out with an oddity called the Cabbage Patch doll.

Maybe you remember: Cabbage Patch dolls became a craze. In August 1982, the company’s stock was languishing at about $7 a share. By June 1983, it was trading at a whopping $65 a share.

When the fad for Cabbage Patch dolls faded, Coleco’s stock fell off a cliff. First, shares plunged more than 50% from June to August 1983. By March 1984, Coleco stock had plummeted to roughly $10 a share. In 1988, the company filed for bankruptcy.

The takeaways…

Beware of the madness of crowds. Smooth sounding assurances from TV pundits or corporate management can be either empty rhetoric or outright lies. Also beware of investment fads. The wild popularity of Cabbage Patch dolls reminds me of the Dutch Tulip Mania of the 17th century, which ended badly for all concerned.

Editor’s Note: Want to leverage market mayhem to your financial advantage? Consider the advice of my colleague Jim Pearce, chief investment strategist of Mayhem Trader.

A former stock broker who has lived through his share of booms and busts, Jim Pearce is always scouring the market for the next “Hindenburg stock.” Jim has devised a system that profits from market imbalances. To learn about his next money-making trades, click here.

John Persinos is the editorial director of Investing Daily. Send your questions or comments to mailbag@investingdaily.com.

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