Inside An Investor’s Mind

07markets-illustration-popup1

Little more than one year ago, I bought shares in Canada’s largest airline, Air Canada (TSE:AC), at about $9 per share. At the time, my investor geek friends (naturally, I count myself among the geeks) questioned whether jello had replaced the brain previously inhabiting my head.

Historically, you see, the airline industry has not been friendly to investors. That, I suppose, is putting it mildly. For the brutally honest take, lets defer to legendary investor and gazillionaire, Warren Buffett, who called the airline business a ‘death trap’ as recently as 2013.

From one notable quip to another, Buffett offered this in your face sketch:

“If a capitalist had been present at Kitty Hawk back in the early 1900s, he should’ve shot Orville Wright; he would have saved his progeny money.”

So … if I haven’t been invaded by jello, what makes me think I know more about investing than Buffett?

brain


Research, Research, Research, Before You Buy

Let’s get this out of the way: I fully recognize the limits of my investing chops. Besides, comparing myself to Guru Buffett? Really? He’s a self-made gazillionairre. I’m not. Enough said.

Then what was I thinking?

To start with, life is nothing if not teeming with change. And that includes the aviation industry. So when I read a research report issued by TD Securities (TSE:TD)(TSE:NYSE) that argued the case for AC, saying that the airline was massively undervalued, and slapped a $21 target price on a stock hovering around $9, I took notice.

But, hey, it’s just a research report. And it’s essential to keep these reports in perspective, to understand that the company issuing the report may be self-interested (i.e., they may own the stock directly or through a subsidiary). That if you have ten securities companies issuing reports on one publicly traded company, often, nine will have a ‘buy’ or ‘hold’ recommendation and one lone voice will issue a ‘sell’ recommendation.

What does this all mean? While stock analysis may be informative, prudent and reasonable, it’s also self-promotional. By way of research reports, analysts do what they can to support the investment industry, to get investors to enter and stay in the game.

So while TD’s report was intriguing, it wasn’t enough to convince me to buy AC.

And the $21 target price? Which was more than double the current value?

Every investor must absolutely, positively, take these with a healthy grain of salt, skepticism and doubt. If I’m not making myself clear, how about this: Do NOT make investment decisions based solely on a stock analyst saying a certain stock is about to lift off, destination moon.

Because here’s the thing about target prices: they’re educated guesses, nothing more. Granted, securities analysts have access to more information than your typical investor, and may have more of an understanding of a particular industry and inner workings of a particular company. But, and this is hugely important, they do NOT know where a stock is headed, no matter how confident and blustery they appear.

 


Off Target

Consider a research study published in 2006 by Mark Bradshaw of Harvard Business School and Lawrence Brown of Georgia State University. These two guys examined nearly 100,000 12-month price targets issued by analysts from 1997 to 2002.

And here’s what they found: only 25% of stocks were at or above target at the end of a 12 month period; and less than 50% of stocks exceeded the target (then fell back) at some point during the 12 months.

This is their conclusion:

“Target price forecasts are overly optimistic on average, and … analysts demonstrate no abilities to persistently forecast target prices.

This evidence is consistent with prior findings of low abilities of various experts to forecast interest rates, GDP, recessions and business cycles, and the infrequency with which actively managed funds beat the market index.”

Okay, fine. Then are price targets and analyst reports of any use? Sure. Read the reports. Understand the rationale for slapping on a high price target. But don’t be sold. And certainly don’t let these reports be your only information source upon which investment decisions are made.

Getting back to AC, reading TD’s report was step one. After which I reviewed AC reports issued by other securities firms; researched and compared other airlines based within Canada, USA, and elsewhere; and read domestic and foreign newspapers, searching for information about the airline industry. And after taking time to digest all this information, I made the decision to buy AC.

477148614


The Times, They Have A Changed

It just so happens that as I was contemplating purchasing shares in AC, Warren Buffett was considering buying certain American based airlines. And after word got out that Buffett invested nearly $10 billion in four airlines in late 2016, he had this to say:

“It’s true that the airlines had a bad 20th century. They’re like the Chicago Cubs. And they got that bad century out of the way, I hope.”

As an investor, what did Buffett’s considerable investment do for my psyche, for my decision to buy AC? Reflexively, I experienced a boost, felt good about my call. ‘Hey, look at me, I got in the game before Buffett.’

Then I talked myself down. I mean, what did it really matter that I spotted an investment opportunity before Buffett? It meant nothing other than I may have had access to some similar information. And just because Buffett is buying airlines, that in itself is no reason for me to buy. Because my investment objectives are likely different than his. Because he can afford to lose $10 Billion, and I’ll be hurt if I lose a lot less. And most importantly, even though Buffett is an investing genius, he’s human (gasp!) – no, really, he is – and he too experiences losing investments.

4-buddha-buffett

 


Higher and Higher … Not

This week, nearly one year after my buy of AC, the stock soared to $22. More than doubling my money. Well, look at that, the TD analyst was right! Uh huh. And on 50-75% of his other predictions he was wrong. So, as my teenage son would say: whatever.

Still, I have to tell you I was feeling good. To my thinking, I bought low, and sold high. The perfect trade. And I rode that wave of satisfaction for about 24 hours. Because the next day, I read a new report issued by TD. Seems that they have now upped their target price to $34. Other securities analysts have also increased their target price, most to the mid and upper 20s, with one lone voice calling for a fall back to the teens.

And for a few minutes after reading these ambitious price targets, jello does jiggle my brain. Suddenly anxious, I’m thinking, uh oh, did I sell too early? The analysts say AC stock is going even higher! I could make even more money! Oh no! Why did I sell?!

The insanity then passes. BuddhaMoneyLama takes hold, reminding me that greed sucks. Telling me to be grateful for my good fortune, for my wisdom to sell at a peak. All is good now. Mental balance returns.

Will AC go higher still? Maybe. Do I care? No. Because I’m no longer invested. Because I’m satisfied with my profit and am now looking forward to investing the proceeds in other companies that offer better value.

And I’m certainly not buying the analysts bluster that the stock will now rise another 75%. I mean, this is what analysts do. If they’re lucky enough to make a correct call on target price, as soon as the price is reached or within spitting distance, they raise their target even higher. ‘Hold forever; the stock will go up, up, up!’ And they do this because it’s their job, to entice more people to invest in the stock market.

Here’s what I have to say to that: don’t succumb to jello brain. Once a security has reached YOUR target price, whether on the upside or down, stay disciplined and sell. Say thank you very much. And move on to the next investment.