Should You Buy the Stocks of Bankrupt Companies?
Hertz (HTZ) filed for Chapter 11 bankruptcy protection. Its debts exceed its assets, and it’s highly likely common shareholders will be wiped out. Yet Hertz stock is trading well above its post filing low. And Hertz got permission to sell more shares, in bankruptcy — something that’s apparently never happened before. Nor has a sharply negative price on West Texas Intermediate crude oil futures, but that happened, too. What’s going on?
In a word, it’s high stakes gambling. There’s a very slight chance Hertz’s shareholders won’t be wiped out, and gamblers (speculators) are having fun with that. At 60 cents a share, why not buy 100 or even 10 shares? It’s a pure lottery ticket, and if there’s a greater fool to come along — and so far there have been — why not?
Market veterans are shaking their heads, of course. Jim Cramer, who is about 99% entertainment and 1% sage, actually had some insightful comments late this past week. He explained how this form of gambling can be really, really long-term devastating. Early career workers who do this so often get burned, and the “lesson” they learn is that stocks are risky, awful things, never to be touched again. Which means these gamblers exit with their gambling losses and never prudently invest, an entirely different practice. And that’s sad. We see many such stories in this forum.
No, I don’t think you should gamble, or if you do then try to pick something that isn’t even somewhat related. Play mahjong once a week for coin stakes, for example.