Investors like to learn or should.
Our company has noticed this (and benefited from it) as we have thousands of clients who are constantly questioning the market, the economy, individual stocks and, yes, even our research opinions.
Along these lines, let’s outline five facts and investment strategies that might not be common knowledge to the average investor.
Experts do not know everything
Sure, professional investors and fund managers work full time on your portfolio, have access to companies’ management teams and subscribe to great data and financial streams for information, but the market is still bigger than them and we have seen lots of very smart fund managers make very big mistakes.
One of the biggest mistakes is doubling down on a losing investment. Smart (and, we have to add, arrogant) investors sometimes tend to believe they are right and the market is wrong, so they buy more and more of a losing position.
Valeant Pharmaceuticals International Inc. (VRX: TSX) is the best example of investors doubling down over the past few years.
Some general fund managers also make wholesale bets on sectors, with one general Canadian equity fund we follow now sitting at 49 per cent energy. Its five-year performance: negative 13.4 per cent.
Again, these managers believed they were smarter than the market.
The “sell on news” phenomenon
We get lots of question from customers along the lines of: “XYZ Co. reported great earnings, why is the stock down?”
Like it or not, there are many investors who trade around news events. They may have bought for an earnings announcement, contract win or some other corporate event. Then, when this event happens, they move on to the next trade.
Look at Covalon Technologies Ltd. (COV: TSX-V) this week. No Bay Street analysts follow the stock, so there were no earnings estimates to miss. But that didn’t stop the stock from dropping 40 per cent in the three days following its earnings release.
For the record, we did not think the results were that bad at all.
Defensive sectors can still decline — a lot
We need only point out the truly horrible performance of preferred shares in 2015 or utility stocks this year to make this point. When markets shift, even so-called safe stocks can still take big, big hits.
This year, with investors fretting about higher interest rates, we have widow and orphan stocks such as Enbridge Inc. (ENB: TSX) down 13 per cent and Fortis Inc. (FTS: TSX) down 14 per cent.
Takeover rumours are a dime a dozen
If we bought into every takeover rumour we’ve heard over the past 30 years of investing, we would still own about 1,000 different stocks. Sure, maybe five or six of the rumours came true and resulted in a takeover, but most do not.
For example, Mattel Inc. (MAT: NYSE) surged late last year on rumours Hasbro Inc. was acquiring it, yet the stock is now back hovering near its lows. Callidus Capital Corp. (CBL: TSX) has been talking about going private for more than a year — we are still waiting.
Be careful when buying into any takeover rumour.
Never ignore a stock forever
Many investors, once burned on stock, refuse to ever look at that company again. We understand the frustration, but ignoring any name reduces your potential investable stock universe.
We used to own Avigilon Corp. (AVO: TSX) in our Model Portfolio for clients. After many quarters of missed expectations and weak earnings, we got frustrated and took it out.
Late last year, though, we added the company back to the portfolio after it reported several good quarters and sold its head office building for a nice profit. We were rewarded this year with a $27 per share takeover.
Obviously, someone else (Motorola Solutions Inc.) also noticed things had changed, but we would never have had a gain for the portfolio had we ignored the stock.
Things change, markets are dynamic. Do not limit your investment options with a bad attitude towards a former loser stock.
Peter Hodson, CFA, is founder and head of research of 5i Research Inc., an independent research network providing conflict-free advice to individual investors (http://www.5iresearch.ca).
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