Yesterday, this happened.
That’s the one day chart for Google, and as you can see, the stock had an interesting day. It all started around noon, when communications company R.R. Donnelley accidentally released Google’s third quarter earnings some 4 hours early. (Quick! Click that link before the Globe puts up that paywall.) Google’s earnings were pretty bad, coming in at $6.53 per share, compared to expectations of $8.76. The market responded immediately, sending the stock some 9% lower, until the NASDAQ made the decision to halt trading on the stock to sort out all the chaos. There was a small recovery once the stock traded again, but the damage was done. Google ended the day down some 8%.
Why were results so bad? There were a couple reasons. The company acquired Motorola back in 2011, and results haven’t been good. Motorola itself lost over $500M the last quarter alone, and people often forget that Google doesn’t actually make a dime off licensing its Android operating system for smartphones. This is looking like a worse purchase than that time I bought a whole bunch of condoms for that Craigslist organized orgy.
Meanwhile, Google’s cash cow, online advertising, also showed weakness. More people are searching for stuff on their mobile devices, and Google hasn’t quite figured out how to monetize that. Sure, they’re growing mobile advertising revenues, but there’s no doubt the desktop market is more lucrative for the company.
If you multiply these earnings by 4 (I know, not a perfect metric, but hear me out) you get annual earnings of $26.12 per share. That puts the stock at 26.6 times earnings, which is pretty rich for a company that just posted crappy results. So while I followed this whole thing with interest, I’m obviously not buying the stock anytime soon.
Cue the knee jerk reactions.
bummer. Only about $300 liquid in my stock account so even when Google is tanking I still can’t afford it.
— Bridget (@moneyaftergrad) October 18, 2012
(Aside: I’m 99.9% sure Brig thinks I hate her. Go here for further confirmation. I really don’t. It’s just, well, she makes it so easy. I can’t help it. It is my kriptonite.)
Anyhoo, don’t do what Bridget does. Don’t buy stocks without doing proper research first. Now, in her defense, she didn’t actually buy it. But she sure wanted to.
I am not a believer in the efficient market theory. I believe, like every other value investor, that pockets of value exist in the market, for various reasons. Sometimes, the market doesn’t look past a company’s short term problems. Other times, companies can be small and unloved. Or, like cigarette companies, people overlook their outstanding profitability because what they do isn’t exactly ethical.
The point is, I think there are pockets of value in the market. You’ve just got to put in the work to find them.
Which is why I get so upset when investors view stocks as they’d view a pair of shoes. They think “hmm, this stock is 10% cheaper than yesterday. Therefore, it is a terrific buy. I like buying things on sale.” This is a really bad attitude to have when investing.
Say you bought one share of Google today, for the closing price of $695. Assuming you started your research at 1pm eastern time, (around when the stock was halted) you would have had a maximum of 3 hours to research the stock. Assuming you read annual reports regularly, that would give you enough time to get through Google’s last one.
Meanwhile, the last time I traveled, I guarantee I spent more than 3 hours comparing the prices of flights and hotels. Hell, for a while there, Hotwire temporarily replaced porn as the most visited site on my computer. My total flight cost: around $750. The hotels were maybe $1000. Why will people research for hours to save a few bucks on a flight, yet shun research when investing?
We all know the answer: because it’s hard. Learning accounting is hard work. Reading annual reports are boring. Math? NOBODY TOLD ME THERE’D BE MATH. Yeah, I get it. Believe me, I’d much rather be watching baseball playoffs than poring over Research In Motion’s latest quarterly numbers. But I do it, because I owe it to my money.
Nobody expects you to become the next Warren Buffett. Hell, we barely expect you to amass the investing knowledge of Jimmy Buffett. But how do you expect to ever become a decent investor if you don’t even try?
Here’s what I do when I’m interested in a stock:
- I read the last 3 annual reports. (although, admittedly, I start with the most recent and skim much of the other 2)
- I read any quarterly releases the company has issued since the last annual report.
- I check to see whether company insiders are buying or selling shares.
- I read a few investing websites and message boards, seeing what other investors think about the stock.
- I’ll then write up a piece on the company, (these days I write those over at Seeking Alpha) and see if other investors tear it to bits.
- Then I might buy.
I’ve only ever timed my research process once, when I looked at investing in beleaguered Japanese electronics manufacturer Pioneer. It took 10 hours of research for me to ultimately pass on the company. (Mostly because they still manufactured their wares in Japan, making them horribly expensive.)
You might just think that’s excessive. And maybe it is. But do you see the huge gap between what I do and deciding to buy a stock just because it went down one afternoon?
You’ve got to crawl before you walk, and walk before you run. It’ll take hard work and dedication to get to the running stage. If you’re not willing to put in the effort, stick to investing in mutual funds and indexes. If you’re gonna buy something without researching it first, stick with shoes.
There are some stories that could alert you to a good buy. A few weeks ago I was looking at RIM to figure out a hypothetical options trade, and then this week I saw a projection that put its earnings next year, if BB10 launch goes well, at a number that sounded a lot like its stock price last month. That kind of thing might be worth looking at a bit closer. Plus, if you can’t afford a single RIM share you have serious problems (even though stock prices don’t mean much the fact that you can’t afford one share might be a sign that it’s expensive). But in the end, taking the time to research that, or even open a paper-trading account, instead of doing things I actually get paid for would cost me way too much. The best return for me comes from not having to spend more than 30 minutes a year on research.
This is a very interesting tangential thought – how researching is or is not worth it. If anyone is to pursue active investing, I think they have to do so with commitment. It’s not something that you can do irregularly, and more importantly, it’s not something that you can do once. It’s something where experience matters.
When I research a company I never see my time as lost. If anything, I’ve acquired valuable experience in valuation methodology and new insight into an industry, sector, or business model that I never had before. I won’t lose that knowledge; it will follow with me for as long as I live. Learning more about a business is an investment – it’s an asset that produces value for years and years. I know a lot about shipping and airline stocks, and yet knowing a lot about them, the only actionable thing I’ve learned is that I’ll never own airline stocks or shippers.
Maybe that’s a waste of time, but I don’t really think so. I look at stock picking oppositely – it’s not about finding what to invest in. Rather, investment selection is about ruling out potential investments. Over the long haul, the index goes up. Over the long haul, some select stocks go up more than the index, some go up less. If you can remove some of those companies that will post lower returns to investors then you have improved your investment results. Alas, since most active investors hold fewer than 10 or 20 positions, people see it as selection when in reality it is mostly disselection – the removal of bad investments to find 10 to 20 rock solid investments.
My portfolio is not huge, but it is growing. While research may not provide tremendous economic profits at the present day, the value of that research and knowledge I build now will grow directly with increases in my portfolio size. Time is a currency that can be invested like any other – and it is an especially good investment if you use it to become more knowledgeable about something that can make money for you.
Just my two cents.
Great points. I’ve read enough about the high-level theory and history of the markets that I’m comfortable managing a portfolio of index funds and reading the occasional news piece to get a sense of what people are doing in the market now. That “investment” of background knowledge allows me to have a general idea of what I want to do without having to do a lot of ongoing research.
It seems like investing in individual stocks require a much more detailed view of their current financials, news, and strategies, but you can still rely on what you’ve learned in the past to interpret those and cut down the ongoing research time. I like your view that you want to cut out the bad stocks instead of finding the top ones. The general terms of the deal are good for investors but there are certainly a lot of bad investment opportunities dragging down the averages!
There are many other ways to become more knowledgeable about something that can make money for you though. For example in a lot of areas you can learn an industry well, get some proven results, and then do consulting/joint ventures for a few hundred thousand per year. Or you can start a business, get to that level, and keep moving up as far as you want. It would take a lot of capital to make those kinds of gains from stock research. Maybe when I have a $10M portfolio I’ll drop everything else and just manage stocks
I agree with all this.
Everybody always says how education is never wasted, (which is crap, btw) but learning how to be a better investor is a skill that people should learn. It’s part of financial literacy and whatnot. Although, I’d suspect guys like us do this stuff because it’s interesting, and the tangible skills are a secondary benefit.
Besides, once you learn all about an industry, it can make for some interesting party conversations.
HEADDESK.
fml
“Anyhoo, don’t do what Bridget does.”
Adding this to my list of personal commandments.
You’re right about Android licensing. BUT by controlling Android’s apps, search, etc., Google has gotten an absolute chokehold on the mobile advertising market; like you say, AdWords is their bread and butter. At the moment, estimates are that 10% of the average North American’s media-interaction time is spent on mobile platforms. Yet advertisers are only committing about 1% of expenditures to this medium; that’s by far the biggest dearth (the 2nd, btw, is radio believe it or not). That’s bound to increase. Android positions Google best to take advantage of this disparity.
Apple makes money selling hipsters their inferior phones. RIM makes money providing data services that are highly secure. Google makes its money from advertisers — the difference is, it doesn’t even need to make the handsets, just the software!
If Google doesn’t need to make the handsets, what was up with the Motorola acquisition? I’m still scratching my head over that.
There’s definitely a bull case to be made for Google. If the share price was $300 cheaper, it would be interesting. Now it’s just slightly less overvalued.
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