Five things investors can safely ignore
The hype, chat boards and predictions are some time-wasters, Peter Hodson writes.
We get it, you’re busy. Work. Family. Holidays. It’s a tough time of year for most. If you are an investor, it’s even worse: In addition to the points above, you need to also deal with year-end portfolio adjustments, tax-loss selling, income tax preparation and dividend-tracking. We’re here to help.
We can’t predict the markets, nor tell you when rates will stop rising. What we can do is save you time — by telling you what you can IGNORE in the markets.
If you can ignore a few things, then naturally you’ll have a lot more time for more investment research, or holiday parties, or whatever floats your boat.
DAY-TO-DAY CHANGES IN STOCK PRICES
Seriously, there are investors who look at every trade on a stock, every tick up or down, and try to interpret some meaning out of all the minutiae. Forget about it. There are always reasons behind every trade — but you won’t know them.
Maybe a fund manager got a large redemption, maybe someone needed money for a house. Maybe a firm is accumulating shares for a takeover. It could be anything, and trying to examine every trade for a hidden meaning is just going to take away time that could be spent doing real investment research.
Let’s look at Wednesday’s trading on Aurora Cannabis (ACB on TSX). Sure, it is in the midst of a takeover attempt of CanniMed (CMED on TSX). But on Wednesday there were 13,446 individual trades in the stock.
Looking for hidden meaning might make your head explode, and you still wouldn’t “know” anything for certain.
ANALYSTS’ TARGET PRICES
Many investors take analysts’ words for gospel. But think about it for a second. If an analyst could really, accurately predict where a stock is going to go, why would they need a job at all?
If I knew a stock was going to stop rising at, say, $80 per share then surely, I would leverage up my account, buy it, then sell it at $80 and even short sell it if it went higher than my target. Easy street, here we go. Ummm—NO. Research analysts tend to be conservative, and follow each other.
This typically means they are too slow to endorse winners (they are cautious), or too fast to “pick on” losing stocks (no one likes those, anyway, so let’s lower our target price). Studies have proven analyst targets are really no better than a coin toss.
CHAT BOARDS
We will admit that, sometimes, one can get a tidbit of interesting information off of an internet chat board on stocks. However, it is a needle-in-ahaystack thing. You might need to sift through 100,000 comments (and rants, and bigotry, and promotions, and screaming matches) to get one useful piece of information. It is not worth the time at all.
Of course, most posters have a hidden agenda — either they are promoting a stock they own or are bashing one they are short. Every time we find ourselves looking at internet comments we wonder — after about a minute — why anyone reads such stuff.
ECONOMIC PREDICTIONS
It has been said that economists have predicted 15 of the last 10 recessions. Most were saying the stock market rally was in its “final innings” in 2013, yet here we are, still near record highs four years later.
We have nothing against economics — after all, it was our major in university — but it is far more useful in understanding what is going on in the world right now, rather than having any inherent predictive abilities.
For everyone predicting an economic recession we can easily find another expert predicting economic growth. The problem is that the world is always changing. A prediction may actually have validity today, but tomorrow there will be a whole new set of data that changes everything.
We think you can safely ignore those 100-page economic forecasts that brokers tend to come out with at this time of year.
CANADIAN IPOS
We have beaten up Canadian IPOs in the past, so we will be brief. Basically, just avoid them.
Roots (ROOT on TSX) is the most recent example. Issued at $12 per share in September, it is now $9.50. Freshii (FRII onTSX) was launched to big hype, but shares are about half of their IPO price.
IPOs take a LOT of due diligence — after all, there are no public reportable documents to work off of. What’s more, while there is a lot of detail in any prospectus, it really is just a sales document designed to get the IPO out the door.
Stick with known, established companies instead, and save the hassle and time of figuring out a “new” company. Financial Post
Peter Hodson, CFA, is founder and head of research of 5i Research Inc., an independent research network providing conflict-free advice to individual investors.