How Debt Can Sink Your Investment

In my years as an investor, if I had to point at the single most destructive aspect to an investor's portfolio, I would point to debt. More failures, blowups and capital wipeouts have occurred as a result of debt than for any other reason I can think of. And the losses are not always because an investor employed too much leverage. There's another danger that many investors fall victim to, and the results can be just as horrific.

Rather than taking on their own leverage, many investors do the next worst thing and invest in highly indebted companies. My simple advice to 95% of investors out there is to avoid companies that have too much debt. No ifs, and or buts: Simply stop investing in companies that have too much debt.

While many columns give suggestions on what to invest in, this column will focus on investments you should avoid. Quite frankly, avoiding mistakes is the single most effective way to guarantee a successful outcome. Yesterday's winner of the PGA Championship golf tournament, Rory McIlory, had the fewest number of bogeys all week. He started the tournament with a bogey-free round on Thursday and shot the only bogey-free round on Sunday to win his second major by a commanding eight-stroke margin. Rory avoided the mistakes and found himself in the winner's circle.

If you look back to 2008, the one industry that has been the most decimated to this day is maritime shipping. It's no coincidence that most businesses in this industry have the most levered balance sheets. DryShips(DRYS) has long-term debt of $4 billion against total assets of $8 billion, of which $7.5 billion is cargo ships. Five years ago, shares were trading for over $120; today the stock languishes below $3, and I would not be tempted despite the "low" price.

Fast forward to today, and the song remains the same. ATP Oil and Gas(ATPG) has spent the past couple of years stacking its balance with more and leverage. Over the years, I was a big of ATP: it had a great business model, high-quality reserves and a reasonable balance. That all changed over the past couple years, and ATP went from being an investment to a speculative bet in my book.

Unfortunately, it looks like the equity is no play at all anymore: Last week, ATP's shares plunged more than 70% to $0.35 as news surfaced that a bankruptcy filing was imminent. In the past three years, interest expense swelled from $40 million to over $300 million. In the past three years, the stock has plunged from over $15 to penny-stock status today.