Thomas Cook is bust, there is more than one reason. For shareholders, there is no protection from such a catastrophe, what lessons can we learn?
Thomas Cook: what lessons can investors learn?
For purchasers of holidays via Thomas Cook, there are safeguards in place. If they had booked a full holiday, it was ATOL protected, meaning they will get their money back, eventually. Likewise, if they had paid for their holiday by credit card, then their credit card provider is jointly liable. But for shareholders there is no such support. If you had shares in the company they are now worth zero.
I must admit, I wondered whether I might have to start eating humble pie. Back in May I asked: 'Is Thomas Cook now a bargain?' For a nasty moment, I thought I may have said something positive.
In fact, I said: 'Shares are now so low that it is tempting to say they can only go higher. But that is not true, they can go lower, they can go all the way to zero in a packet labelled ‘receivers office.'
'There is a chance that you could make a nice profit by buying, just as happened in 2012. There is possibly a higher chance you will lose your money.'
We can talk about why. We can talk about executive pay at the company, we can talk about rival companies cashing in on the plight of passengers. But I think we need to come up with a more meaningful lesson.
For what it’s worth, I think Thomas Cook’s big mistake occurred in 2007 when it bought ‘My Travel.’ The move saddled the company with debt, which ultimately proved too much. The internet did not help, although in latter years Thomas Cook tried to work with the internet, but the fact is, it was saddled with a massive branch network. Disasters and terrorist attacks made things harder. Brexit was not the cause of the collapse, but it was a factor. The post Brexit fall in the pound made overseas holidays enormously expensive for Brits. Back in May, the company itself said that the low pound, forcing up the cost of holidays in the Canaries, had contributed to weak results. Brexit did not cause the collapse, but without the related falls in the pound, it might have been avoided.
The underlying problem though was that the company’s margin on every holiday booked was too low. The internet lowered barriers to entry, fierce competition meant Thomas Cook had to keep prices down, but this meant a massive hit on profits.
I note some newspapers blame executive pay. If you want to argue that executive pay is too high just about everywhere, you won’t get disagreement from me, but I don’t think you can say this was a factor behind the demise of Thomas Cook. Salaries to senior management, even over the last ten years, were tiny compared to the debt it incurred 12-years ago. It paid its board the market rate. The markets are amoral, but they are a reality Thomas Cook had to live with.
But for me, this is a reminder of the worst case — in the investing game, it is possible to lose all your money.
Investing in individual stocks carries a risk.
The only way to reduce this risk is via diversification.
If you have an appropriately diversified portfolio then I don’t think investing is any more risky than anything we do in the risk that is living. Going out the door, jumping on a plane, even eating carries risk. Putting all your investment into cash is risky, too.
But ensuring your portfolio is really diversified is not just a matter of investing in lots of companies.
You could say, ‘well, I have a diversified portfolio because in addition to investing in Thomas Cook I invested in TUI, RyanAir, Easyjet, IAG etcetera’. Well, in the immediate aftermath of the Thomas Cook collapse, many of these companies are doing quite well. But I suspect that in the medium term, other businesses will form trying to fill the void left by Thomas Cook. That’s what low barriers to entry mean.
No, for real diversification you need investments across sectors, and indeed across territories. The recent falls in sterling show how a diversified portfolio needs exposure to at least some companies that do most of their trading outside of the UK.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees