Apprenticed Investor: Protect Your Backside

In terms of lost investor wealth, Enron actually compares favorably to other flameouts. EMC, Cisco Systems CSCO and General Electric GE each "lost" over $100 billion in market cap from December 2000 to their 2002 lows. From the perspective of market-cap loss, Lucent LU shareholders would also have been collectively better off owning Enron instead.

Even (once) mighty Microsoft MSFT -- with a market capitalization of $266 billion as of Thursday's close -- has suffered enormous losses. From its split-adjust peak of $60, to its post-bubble low near $20, more than $300 billion in Microsoft shareholder valued has disappeared.

So compared with any of these market crash calamities, Enron loss is relatively minor. That is truly astounding.

And it's not just the tech sector where shareholder losses accrue: From December 2000 to the present day, pharmaceutical giant Merck MRK has dropped $120 billion in value. Even oil colossus Exxon Mobil XOM lost over $105 billion of market cap from November 2000 to July 2002, before rallying in conjunction with rising oil prices.

What Moves Stocks?

In order to limit the havoc "disaster stocks" can wreak, it helps to understand what moves share prices.

Investors typically look to a variety of short-term factors. Ask most people why their stocks are going up and down, and they'll reel off a list of news-driven events: economic releases, analyst rating changes, quarterly earnings reports, conference calls, etc.

These factors have a de minimus impact when compared to the real action. The true cause is much less complicated: Share prices are moved by large-scale buying and selling by institutions. We discussed this extensively in Tracking the Elephants.

This relates directly to Enron's stunning decline from over $90 to zero.

Enron From peak to pennies

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Source: Barry Ritholtz

Enron's stock gave many signals that it was under "distribution" by large shareholders. You may not have read about it in the paper, but Enron's chart told astute observers that big institutions were quietly unloading millions upon millions of shares.