Most important lesson from Bear Stearns fiasco - Asset Diversification

Bear Stearns is history now! It has been taken over by JP Morgan Chase for $235 million in a stock swap deal whereby, each individual share of Bear Stearns is valued at $2.00 (USD Two!!) The stock of Bear Stearns have plummeted in value from $160 in March 2007 to $2 in March 2008. The fall is tremendous and it is well beyond the imagination of all.

Most important issue part of the whole episode is how staff members of Bear Stearns have been terribly impacted by the takeover of JP Morgan Chase. Bear Stearns employs 14,000 people across the globe and the staff own more than 30% of the stock of the company. The worst affected lot seems to be them who have lost all their wealth due to this merger.

This throws up an interesting as well an very important point: asset diversification. However confident you are about your company, it is prudent to en-cash part of your share holding in your own company and move it to assets outside your business/industry/sector to provide downside protection. We need to accept the fact that the success or failure of a company are outside the scope, influence and control of ordinary employees, and it is for their good sake they diversify their assets rather than just holding on their employers shares. We have covered the need for asset diversification in our post "Prudential Financial Management". Click here to read the article.

Who in this world would have thought that Bear Stearns would go down in March 2007 when it was quoting at $160? The net worth of the company's Chairman fell from over $1 Billion to just over $12 million in exactly 12 months time.

We have at least 50 companies in India which has provided shares to their employees and made them millionaires over the last 10 years, like Infosys, Wipro, CTS etc. We strongly advise these employee millionaires to convert part of their holdings in their employer company in a orderly and timely manner to diversify into other income generating/capital appreciating assets to avoid a la Bear Stearns!!