Catastrophes and Your Investment Risk
Bad news travels fast and can dramatically alter the prospects of your stock.
The BP oil spill is the latest example of a catastrophe bringing the methods of a company and its industry into question, but it is important to consider the potential risks of every investment.
That's not to scare you off altogether as an investor, but to point out that it makes sense to diversify your holdings -- for those times when bad turns to worse.
When oil tanker Exxon Valdez ran aground 21 years ago, spilling 11 million gallons of oil into Prince William Sound and the Gulf of
Following BP's prior explosion in
Compare that to 1982, when
But early this year
It subsequently expanded the recall for additional packages that it said were inadvertently omitted.
"Though it built up a vast reservoir of goodwill over the years after Tylenol,
Parrish is less critical, noting that even
An investor should do homework on every company he invests in to determine competitive, legal and catastrophic risks, as well as financial strength.
"It is hard to say any one or two stocks or companies are immune from having problems," said
You can't directly compare risks of BP versus a consumer products firm such as
Consensus analyst rating of reduced-price BP stock is between "buy" and "hold," according to Thomson Reuters.
"BP was slow getting in front of its problem and didn't seem to be fully open," said Fitzpatrick. "It indicated it had the problem under control when the opposite was true, it didn't have a good disaster recovery set-up and no one knew when the leak would stop."
There's still considerable risk in BP due to the unknown extent of liabilities, he said, so an investor would have to take the "high-risk/high-reward" long-term view. Fitzpatrick said he'd tell clients to stay away from BP stock, but considers many oil stocks attractive because their low prices are unwarranted.
"I couldn't fathom BP not surviving because it has so much in proven and unproven reserves around the globe," concluded Parrish. "However, it made a bad bet by self-insuring one of its higher-risk wells."
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