Pro tip: Don’t be fooled into adjusting your investment portfolio for another ‘non-crisis’
You just may miss out on a good stock if news sways you, Peter Hodson writes.
We are in the midst of preparing a special edition of Canadian Money-Saver magazine, and one of the articles assigned to me is “Lessons learned from 33 years in the Investment Industry.”
We have run some of our favourite investment rules and guidelines by you in prior columns, but we have some more tidbits of advice for you as we head (grudgingly) slowly back to full-scale business in September.
There is always a crisis in the stock market
Investors like to worry, and the media likes to feed this worry. This month’s crisis: Turkey. Markets had a bad week, fretting about a Turkey fallout. But Turkey has a GDP (2016 figures) of only $858 billion. The U.S. has single companies bigger than that. With all due respect to the people of the country, Turkey really doesn’t matter that much from an investment standpoint. Sure, doomsayers will talk about bank “contagion” and there will be some bank loan losses. But that’s no different than all the other “crises” in the world before: Greece, Italy, Russia, Venezuela, Argentina etc. etc. And yet here we are, with markets near record highs (again). Don’t be fooled into adjusting your investment portfolio for a non-crisis.
1 Fear always results in greater volatility than greed
Sure, most investors know that the market runs on greed and falls on fear. But when investors get scared they are far more reactive than when they get greedy. When a company misses earnings estimates it almost always falls more than companies that beat earnings estimates rise. As they say, the market “takes the stairs up, and the elevator down”. When there is bad news at one of the companies you own, take a deep breath. The stock may be down a lot, but is the news really that bad? Investors, as a herd, tend to shoot first and ask questions later. Be careful not to get shaken out of a good stock just because of a bad headline.
2 Investors still focus too much on the short term
We saw some very interesting trading this week in Boyd Group Income Fund (BYD.UN on TSX) and Premium Brands Holdings (PBH on TSX), two companies we follow at 5i Research. Both companies reported earnings, and shares of both initially went on big tailspins. Then — intraday, or the following day — both companies’ shares rose sharply, with Boyd itself bouncing back and hitting an all-time high. What happened? Well, as usual, investors “reacted” to headlines and focused too much on the short term. Premium reported numbers that missed estimates, so investors sold. Then investors paying more attention realized that the company raised its financial guidance. With Boyd, it had a conservative forecast because it can’t find enough technicians. But think about that for a second — business is so good it is running tight on staff. That might be bad in the short term, but investors quickly figured out that it is kind of a good problem tohave.
3 Hostile takeovers almost never succeed at the “first” bid
Another week, another takeover, or at least takeover attempt. Ensign (ESI on TSX) has launched a hostile bid for Trinidad Drilling (TDG on TSX). But, like when you are bidding on a house, your first bid is not your highest bid (well, it shouldn’t be, at least). So, while Trinidad goes into defensive mode and looks for other buyers, Ensign might be sharpening its pencils to see what price makes this a friendly takeover, rather than hostile. This rule doesn’t mean you should automatically start arbitraging takeovers. But, it should at least cause you to stop and pause, and perhaps NOT sell right away if you own shares that pop on an announced hostile bid.
4 Momentum is an investor’s best friend
We had been watching Trade Desk Inc. (TTD on NASDAQ) for some time. Then, last week, it delivered what analysts like to call a “monster” quarter. The stock surged 37 per cent on Aug. 10. Earnings beat estimates by 39 per cent. Now, much still depends on what the general market does, but when a company has such a massive change in fortunes, its shares typically go on a nice continued rally. The big move gets noticed, and, at the very least, such a shift in business momentum does not reverse itself quickly. You are thus generally safe to buy the stock, even after such a big move, for at least a quarter or two. There are always exceptions, of course, but we have made a ton of smart investments AFTER a company has already moved a lot.