4 top lessons the Theranos scandal can teach us as investors 

The Theranos story presents a timely reminder of some age-old investment wisdom that can help me avoid some basic stock-picking pitfalls.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I, like many of you, will be watching the gripping miniseries, The Dropout. It unpacks one of the most bizarre cases of corporate fraud you will ever see. By a blood-testing start-up called Theranos, no less.

The company managed to dupe many high-profile investors. It shows me that I am never too old to learn an investment lesson.

Putting the Theranos case study into context

So, in 2014 Elizabeth Holmes was a 30-year-old billionaire. She had founded a company valued at $9bn (£6.5bn) for supposedly bringing about a revolution in diagnosing disease.

The only problem? The technology didn’t work.

Soon enough, Holmes was exposed as a fake. In honour of the high-profile debacle, here are five lessons from the Theranos story that continue to serve me well in my investment journey. 

Always evaluate the track record of the management team

Firstly, a big clue is in the title of the miniseries – The Dropout. The fact the CEO of the start-up was a university dropout with no track record in the medical industry is an immediate red flag for me.

The saying goes, “there are no bad companies, only bad managers.” To invest, I must believe beyond doubt that the management team are competent and know what they are doing. Otherwise, I don’t!

Don’t worry about other people

As with many trends in life, herd theory occurs in finance when investors follow the crowd instead of their own analysis. In the case of Theranos, the crowd included bigwigs like Larry Ellison and Henry Kissinger. But, no matter how clever I believe my potential co-investors are, it will never be enough to convince me to invest in a stock. At least not unless I have justified this with my own view.

I never invest in businesses that I do not understand

At one point Theranos claimed to be able to perform all manner of tests, ranging from cholesterol levels to complex genetic analysis. All with just a single pinprick of blood.

Admittedly, I am no geneticist, and haven’t met many. This, in all likelihood, means that I will not understand complex genetic analysis. That is my personal signal to avoid investment.

If I don’t understand a stock, I do not invest in it.

I avoid concentration risk at all costs

Concentration risk occurs when I rely too much on a single investment; for example, a single company’s shares.

So, my prime objective is to avoid an over-reliance on a particular stock or security. My portfolio could be exposed to severe losses if the company goes bust. This turned out to be the reality for many an investor in Theranos.

As such, I counter this by spreading my investment risk by diversifying across sectors, asset classes and regions.

I will never invest in a business I do not understand

In conclusion, investment sage Warren Buffett once said “never invest in a business you cannot understand”. This is the rule I have found to be the most important in my stock-picking journey.

As an investor, independent thought and analysis has served me well.

In the end, I’d rather blame myself for my investment mistake, than someone like Elizabeth Holmes.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »