Yesterday, Ken Lay and Jeff Skilling, the two former Enron chiefs, were convicted of conspiracy and fraud. The Dow had its best day in more than two weeks. This wasn't simply coincidence. Investors rely on the accuracy and credibility of financial statements. If they can't assume that statements filed with the SEC are not fraudulent, they will take their money elsewhere. Rampant fraud would destroy the capital markets and prevent honest companies from getting the funding they need to develop the products and services that keep our economy strong. The Lay and Skilling convictions provide a much-needed dose of confidence.
Nonetheless, stocks are still off their early May highs. Of course, some stocks are doing great. However, many investors would be surprised by the leaders. For example, you might expect Exxon to be doing well. After all, high oil and gasoline prices are pushing Exxon's profits to record levels. Indeed, the stock is up about 9% year-to-date. Yet Exxon, which makes the energy that General Motors burns, can't hold a candle to GM. Just a few months ago, many experts were predicting GM's demise. No doubt they're shocked to see that GM is the best-performing stock in the Dow year-to-date. It's the fifth-best performer in the S&P 500. In fact, this money-losing company, which halved its dividend not too long ago, is up an incredible 47% so far this year. Lynn Harrison, a recent guest on MoneyMasters, talked about hedge funds that specialize in investing in financially distressed companies like GM.
Disney is another stock that may surprise investors. We added Disney to the Forbes Growth Investor recommended list last August. You can imagine the reaction. No one seriously thought of Disney as a growth stock. As of today, however, Disney is up 27% year-to-date.
All this points to the importance of diversification. Enron was a real high flier. Then it collapsed. Yet to a large extent, many of those who were wiped out have only themselves to blame. Whenever you put all or most of your money in any one stock, you are taking way too much risk. Many academics believe investors spend too much time worrying about security selection and not enough time worrying about asset allocation and diversification. In fact, I'm in the process of trying to secure an interview with an asset allocation specialist for a future segment of MoneyMasters. Stay tuned for more about this later.