My Short Career as a Stock Picker
People will always buy Fruit of the Loom underwear, right?
The year was 1999. One evening, my wife brought to my attention an article from the Houston Chronicle’s business section: Fruit of the Loom stock was trading at close to $1 a share, a deep drop from the $44 share price of a couple of years before.
The article was light on details about why the stock was hovering just above penny stock territory. However, I distinctly remember thinking that this was a super buying opportunity. How often could I buy a company’s stock for less money than than the underwear I was wearing? I couldn’t imagine the world’s largest seller of T-shirts and underwear going out of business. I thought the market was overreacting to bad news. It seemed more likely that a new management team would turn the company around or a corporate suit type would step in and make a generous offer. The stock would rise, and I could ride along to reap a nice fat profit.
The next day I placed a buy order for 200 shares with my skeptical neighborhood broker and eagerly waited for the stock to rise. What I should have done before plunking down $200 (plus $50 commission), was spend a little time finding out why Fruit of the Loom was currently trading at $1. A little research would have been very enlightening.
The company, founded in 1851 and one of America’s oldest trademarks, was purchased in 1985 by William Farley. The $1.4 billion purchase was financed with highly leveraged debt, a common practice in the 1980s. Over the next 15 years, annual sales quadrupled from $500 million to $2.5 billion. While this would normally be a good thing, servicing the debt consumed all of the company’s profits.
Farley, as CEO/President/largest shareholder, was using Fruit of the Loom as his own personal piggy bank. He granted himself a large salary, donated company funds to his favorite charities and had the company guarantee over $100 million in personal loans. (He was also eventually discovered to be selling his own shares on the sly.) By the late 1990s, losses were mounting. Moving manufacturing to Morocco and Mexico—and becoming an offshore corporate entity in the Caymans to avoid taxes—was not enough to make a difference.
By the end of 1999 Fruit of the Loom dropped a financial turd in its drawers with a reported loss of $576 million. Then the company filed for bankruptcy, declaring $1.6 billion of debt. The board of directors, all handpicked by Farley, finally ousted him and placed the fate of the company in the hands of the bankruptcy court. Within a few months, Warren Buffett, a white knight riding his trusty Berkshire Hathaway steed, made an acceptable offer of $835 million.
This would have bumped the price up to over $12 a share, but all of Buffett’s money went to the creditors. The shareholders, myself included, received nothing when the deal was finalized. My money was gone and I didn’t even have a nice stock certificate to frame as reminder of my folly.
The $250 I spent on Fruit of the Loom stock was a cheap lesson on why stock picking was a mug’s game. Today I embrace Warren Buffett’s advice for small investors and fully fund my 401(k) with a diversified portfolio of index funds with low management fees. Fruit of the Loom remains a global brand and is still part of the Berkshire Hathaway family.
And as for William Farley? The last report I could find suggests that he operates a multilevel marketing company selling health and beauty products.
Gary Crawford is an engineer and writer. He has lived in Canada, Texas and Shanghai. He now resides in eastern Washington.
This story is part of The Billfold’s Financial Fails series.
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