Another great example when some in the market do not follow the same wisdom they give out to the general public is diversification. You don’t have to look far to see some examples for this during the current share market rout.
ABC’s Learning Eddy Groves blind stupidity in margin lending against the company stock without diversifying his portfolio. While I am all for directors being shareholders in the company and aligning themselves with shareholders interests but it against both theirs and our interest when directors become large shareholders borrowing against their shares. The facts of the matter speak to themselves, as Eddy was margin called after the poor result which then made him a forced seller making the price fall magnified for the rest of the shareholders.
Alarm bells should have rung louder when Citibank late last year dropped ABC Learning from its allowable securities for new investors because of the large undiversified position of Eddy. Eddy should have either not have lent against his stock in the first place or expanded his portfolio to ensure that a drop in ABC didn’t sink him and his fellow shareholders.
He has paid a high price, but so he should for his naivety as he should have known better or got some better advice on the matter considering the millions for him that were personally at stake. Maybe staying at QUT a little longer and completing his Accounting studies may have helped a little bit too.
What happens next for Eddy in the next question, he has to deliver some big results with the sale of the companies US centres and stabilise the company to keep his job and at least the possibility of keeping his $400,000 a year salary so he can at least buy a little bit back of his business. The other possibility if he fails to deliver, he be best to clear out his desk as the shareholders will vote him out.
Disclosure: I am currently a slightly unfortunate shareholder in ABC Learning and have included it in a diversified portfolio including a margin loan but am in for the long term. I currently have more than double the shares in the company than undiversified Eddy who at last report had just 3,186.