risk
Size is not safety
The rule
Even huge, famous companies can go broke. A big name is no substitute for reading the numbers.
Where it flips
But fear of giants can also make you wrongly avoid sound big companies. The fix is to judge every company, big or small, by its balance sheet, letting neither size nor smallness replace the homework.
Bigness feels safe, but history is full of famous giants that fell. Railroads, banks and blue chips collapsed under debt and denial while investors trusted their size. The only real safety is the numbers: how well profit covers interest, how much debt there is, how cash flows. A big name with weak numbers is still fragile.
A worked example
A huge, admired company piles up debt, and its profit barely covers its interest. But investors hold on because it is "too big to fail". When a bad year hits, the size that comforted them becomes the weight that drags it down. [illustrative]
How to spot it
- ·"too big to fail" thinking
- ·the reputation trusted over the numbers
- ·rising debt at a famous name ignored
Benjamin Graham · The Intelligent Investor