Toyota has received a lot of bad press the past few weeks. The company once known as the “best car company” that produced high quality affordable cars has becoming the laughing stock of the car industry . Toyota has manufactured millions of cars with multiple defects in them, and then allegedly tried to cover up the defects. No doubt Toyota will lose billions of dollars from this fiasco. I am giving a really rough estimate here, but Toyota plans on recalling around 10 million cars. Toyota will pay the dealerships to fix these cars. Assuming it will pay $100 per car that amounts to $1 billon. I think the costs will be far higher than $1 billion since many of the defects will cost more than this. In addition the company is diverting current employees to deal with all the recalls. In fact I went to my local Toyota dealership the other day and they informed that they would be open until mid night to deal with all the recalls. I assume Toyota will absorb those costs and not the local dealers. The company may also be subject to lawsuits from drivers who suffered serious injuries due to the defects.
Toyota in addition will lose billions of dollars from current and future Toyota buyers. My wife and I both own a Toyota and we will both hesitate buying a Toyota in the future. My wife’s car got in a serious accident approximately a year ago that cost thousands of dollars to repair. Of course the auto insurance company dealt with most of the costs. However, I was forced to pay a $500 deductable, my insurance premiums went up and the re-sale value of the car is now far lower. In addition, my wife’s car an Avalon 2005 was subject to three separate re-calls. I had to bring the car into the dealer on three separate occasions. This was a huge inconvenience and took away from both my wife, and our work schedules. I am sure other Toyota owners are as upset as I am.
I am not just telling a personal story here, there is a lesson to be learned for the investor. Ravi of rationalwalk.com and a GuruFocus columnist wrote an excellent article describing how Toyota spent decades building up decades building up its wonderful reputation (the direct link is here http://www.rationalwalk.com/?p=5015). Ravi notes how quickly that reputation can erode. Ravi quotes a Barron’s article which ranked Toyota #6 on the world’s most respected companies. This survey was taken before all the recalls, I have no doubt that Toyota would rank significantly lower if the survey was taken today.
I think there is another lesson for investors to learn. I think Toyota’s woes justify the merits of having a diversified portfolio. Whether Toyota will be able to un-do the damage it has caused to its brand is a separate question. The main lesson is that there is always the unexpected when it comes to investing. I could have read every single 10Q and 10K from Toyota, read every publication that covers the car industry and there is no way that I would have known that there were all these defects and cover-ups going on in Toyota.
Many people erroneous believe that good investors always have a concentrated portfolio. That is simply not true. Many of the best investors ever including Tweedy Browne LLC and David Dreman have very diversified portfolios. I constantly have a debate in my head whether I should have a more concentrated portfolio than the current one I have. The whole Toyota fiasco has slightly confirmed my preference towards a diversified portfolio.
Toyota is just an example. But there is always the unexpected. You can buy the best company in the world at a low valuation and think nothing could go wrong. But really everything could go wrong let’s say the companies executives are killed in a tragic plane crash on their corporate jet. What if the stock market crashes and the company cannot cover its pension obligations. What if someone discovers Coca Cola’s secret formula? The list is really endless. The point is that Toyota should be a wakeup call. There are many merits to a concentrated portfolio; however Toyota’s woes demonstrate the merits of diversification.
Disclosure: long KO
Toyota in addition will lose billions of dollars from current and future Toyota buyers. My wife and I both own a Toyota and we will both hesitate buying a Toyota in the future. My wife’s car got in a serious accident approximately a year ago that cost thousands of dollars to repair. Of course the auto insurance company dealt with most of the costs. However, I was forced to pay a $500 deductable, my insurance premiums went up and the re-sale value of the car is now far lower. In addition, my wife’s car an Avalon 2005 was subject to three separate re-calls. I had to bring the car into the dealer on three separate occasions. This was a huge inconvenience and took away from both my wife, and our work schedules. I am sure other Toyota owners are as upset as I am.
I am not just telling a personal story here, there is a lesson to be learned for the investor. Ravi of rationalwalk.com and a GuruFocus columnist wrote an excellent article describing how Toyota spent decades building up decades building up its wonderful reputation (the direct link is here http://www.rationalwalk.com/?p=5015). Ravi notes how quickly that reputation can erode. Ravi quotes a Barron’s article which ranked Toyota #6 on the world’s most respected companies. This survey was taken before all the recalls, I have no doubt that Toyota would rank significantly lower if the survey was taken today.
I think there is another lesson for investors to learn. I think Toyota’s woes justify the merits of having a diversified portfolio. Whether Toyota will be able to un-do the damage it has caused to its brand is a separate question. The main lesson is that there is always the unexpected when it comes to investing. I could have read every single 10Q and 10K from Toyota, read every publication that covers the car industry and there is no way that I would have known that there were all these defects and cover-ups going on in Toyota.
Many people erroneous believe that good investors always have a concentrated portfolio. That is simply not true. Many of the best investors ever including Tweedy Browne LLC and David Dreman have very diversified portfolios. I constantly have a debate in my head whether I should have a more concentrated portfolio than the current one I have. The whole Toyota fiasco has slightly confirmed my preference towards a diversified portfolio.
Toyota is just an example. But there is always the unexpected. You can buy the best company in the world at a low valuation and think nothing could go wrong. But really everything could go wrong let’s say the companies executives are killed in a tragic plane crash on their corporate jet. What if the stock market crashes and the company cannot cover its pension obligations. What if someone discovers Coca Cola’s secret formula? The list is really endless. The point is that Toyota should be a wakeup call. There are many merits to a concentrated portfolio; however Toyota’s woes demonstrate the merits of diversification.
Disclosure: long KO
