Peter Hodson: The investment game — even for professionals — is never an easy one
One author of a research note told investors to sell Netflix and buy Blockbuster, not once, but 12 times. Photo by Scott Olson/Getty Images files Have you ever made a very bad investment call? Sure, you have. We all have. Frankly, if you say you’ve never made any mistakes, then you aren’t trying hard enough, or you’re just lying. Otherwise, we would see your name at the top of all the world’s richest people lists.
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But what about making a very public — and very wrong — investment call? Luckily for you, most of your mistakes are very private. Maybe not even your spouse knows about that time you lost $5,000 on a penny mining stock you heard about at a dinner party one day and bought with no research. But mistakes by investment industry professionals can be very public: splashed across research reports, talked about on television, and discussed and ridiculed in investment forums. It’s not fun making a mistake that is so widely known.
Sometimes, investment calls are just so wrong that they follow analysts and companies around for years. Let’s look at some absolute doozies over the years. We’ve chosen five, but, trust us, there are hundreds we could have chosen from. We’re not picking on anyone here, and we’re going to leave out names (Google will know if you really want the details). We just want to remind readers that the investment game — even for professionals — is never an easy one.
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‘China internet stocks are uninvestable’ We’ll start with a very recent one. Just last week, with the threat of sanctions on China and the likelihood of market delistings in the United States, an extremely large and well-known U.S. investment bank put out a research note on March 14 saying the entire sector was ‘uninvestable.’
Talk about bad timing. Less than 48 hours after the research note was public, China announced a series of measures designed to prop up its financial markets and maintain international stock-market listings. Most Chinese stocks soared, some even had their biggest gains ever, as the index representing the sector had its biggest gain since 2008. Clients of the investment bank who sold missed out on gains of 30 to 40 per cent in less than 10 days. Ouch.
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Article content ‘The gold is there, I’ve seen it’ We have to go way back to 1997 for this one, and the infamous Bre-X Minerals Ltd. mining fraud. A very well-known analyst from a large Canadian bank drew a line in the sand with his famous quote above. But, of course, the gold wasn’t there, and $6 billion in stock disappeared as Bre-X went bankrupt. Still, 25 years later, no one has ever been convicted in this giant fraud.
The analyst carried the burden of that call around for years, but it hasn’t impacted him too much: he still works in the industry. And we must give him some slack. Part of the fraud was that someone was “salting” the cores, which involves adding gold to an ore sample. The analyst certainly could have “seen” some gold, but couldn’t have known that the gold in the sample came from elsewhere.
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Article content ‘Sell everything’ In 2016, a very large bank in the United Kingdom came out with a giant research report with the ominous title Sell Everything. It caused a stir as banks are usually conservative and the report oozed a sense of panic. Lots of readers thought it was a joke. But the bank was deadly serious. It was worried about lots of things, and to quote the report: “Investors face a cataclysmic year, and markets could fall 20 per cent. Oil could fall to US$16 per barrel.”
How did this call work out? Well, the S&P 500 has nearly tripled since the report, and oil, of course, is sitting around US$110 today. We’re not sure if the authors of this report still work in the industry.
‘Sell Netflix and buy Blockbuster’ We love this one, because it was so wrong, and the author of the research report refused to give up, reiterating his call 12 different times even as Netlfix Inc. shares soared, and Blockbuster LLC shares plummeted towards bankruptcy. It’s a good lesson to learn, in that the market is always right, even if you think you’re the one who is right.
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Article content Five things to be positive about amidst the market doom and gloom Five reasons investing isn’t much fun right now Five reasons women are better investors than men Five so-called rules for younger investors that need a reality check This was a call from a research analyst at a global investment bank in the mid-2000s. Investors who followed it bought a stock that went to $0, and sold a stock that has risen almost 31,500 per cent since going public in 2001. But the analyst was not the only one who got this wrong. Blockbuster, it is widely rumoured, turned down a chance to buy Netflix for US$50 million. It is worth US$170 billion today.
The economy is not likely to recover ‘for 20 or 30 years’ Even investment firms can make very public mistakes. In April 2009, in the middle of the great financial crisis, a very well-known mutual- and hedge-fund company hosted a gala evening called A Night with The Bears. About 3,000 guests gathered at a fancy Toronto theatre, sipped champagne and listened to five famous short sellers who were espousing doom and gloom in the middle of the market downturn. One speaker noted the economy was not likely to recover “for 20 or 30 years.”
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Article content We attended this event, and it was very depressing. Walking out of the theatre, guests must have wondered why they owned anything at all. The world — according to the guest speakers — was indeed truly ending. Well, neither the fund company nor the guests knew it at the time, but this event was held less than a month after the absolute market bottom. Since then, the Dow Jones index is up almost six-fold. Another lesson here: When everyone is bearish, it is time to buy.
Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.)
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