What The Volkswagen Crisis Tell Us About Large Businesses

I still remember the six months where I went to Wolfsburg, Germany for an internship at Volkswagen AG a decade ago. Wolfsburg is a small town with a population of just 100,000 people at that time. And what is interesting is that Volkswagen, being the largest employer of that town, has more than 50,000 people working in the massive factory that is larger than the actual city centre of Wolfsburg. The experience left me at awe of the magnitude of Volkswagen manufacturing and design capability.

That is why when the emission scandal broke out at Volkswagen, claiming that the company has been manipulating its U.S. emissions tests for its diesel-powered vehicles, caught me by surprise. This incident taught me a valuable lesson on why we should not rely too much on our personal experience in judging a company, especially reputable and large corporation.

Diversify is the key

The current crisis is only one of many incidents where large corporation suffered a huge reputation blow. In Singapore, we have seen a few critical reports surfacing over the last few years regarding some of the largest companies here. In 2012, research firm, Muddy Waters, issued a report, question some of Olam International‘s (SGX: O32) accounting practices. At that time, Olam International’s largest shareholder is our sovereign wealth fund, Temasek Holdings. Similarly, in early 2015, a report questioning the accounting practices of Noble Group Limited (SGX: N21) also surfaced.

I believe that these examples remind us that no company can be view as riskless. No matter how strong the company’s financial, or its stellar reputation among its customers and employees or even if it is backed by some of the largest investors in the world.

The truth is we as retail investors would never know what is really happening within the company. In fact, even employee, like my case in Volkswagen, would not know whether the company is truly acting in an honest manner.

Therefore, because the risk that a company might not be 100% truthful in its business dealings, investors have to practice the concept of diversification. Only by having a well-diversified portfolio can we shield ourselves from the unnecessary surprise that one of our investments might turn out to be a fraud. That is because even if we have investing into one of the questionable companies, it would only be a small portion of our entire investment and thus limit our losses in our portfolio.

In investing, when in doubt, always diversify.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned above.