# Investors are often wrong (why you shouldn't follow the herd)



## CPA Candidate (Dec 15, 2013)

I was recently reflecting on some of the big stories in Canadian investing in 2013 and realized how the general sentiments among investors proved to be wrong, reinforcing my belief that following the financial media and the "common knowledge" of the herd is a recipe for less than stellar performance. Markets are not efficient and emotion, not sound reasoning, rules the herd.

Story 1 - Interest rates and dividend paying stocks and REITs
In May of last year signals were sent by the Fed that interest rates would be going up, causing investors to promply ditch a lot of good investments because of a macroeconomic issue that was far from certain. Nearly a year later, the sell off proved to be a mistake as most of these stocks have recovered their losses. In fact, rates have really not moved since July of last year. I recall quite clearly the talking heads on Market Call calling for rates above 3 and 3.5% by this time.

Story 2 - Verizon coming to Canada
The mere possibility of Verizon coming to Canada caused the telecoms to plummet overnight. It turns out that Verizon was never serious about the move and most likely they wouldn't have inflicted nearly as much harm as anticipated.

Story 3 - Potash
The reported breakup of the Potash Cartel sent the stock down 20%. Nine months later, the stock is right back where it was before the drop. Does Potash face challenges, most likely, but the response of the market was extremely overdone. It proved to be a glorious buying opportunity.

Story 4 - Martinrea
The stock took beating after beating on news that a former executive was suing the company and accusing the CEO of improper payments. None of it was proven, but that doesn't matter to Mr.Market. The stock when down from $11 to $7 during the fall, culuminating with a 20% sell off in December. I held the stock and added as it went lower. Today MRE is back to over $11 and PWC has backed the company's claim the the allegations are baseless.

Story 5 - Short Canada
Around May there was considerable news about people shorting various Canadian banks, most notably HCG, because the Canadian housing market was going to hell. I owned HCG and watched in drop 15% or so. I tripled by position in the company. Since then, the Canadian housing market has not crashed and HCG is up over 60%.

In Peter Lynch's book Beat the Street he wrote about how investing is more guts than brains and how you had to have courage to be good at it. Reflecting on 2013, I see a lot of value in his comments. If you are not doing what everyone else is doing, you are probably on the right track.


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## Pluto (Sep 12, 2013)

CPA Candidate said:


> I was recently reflecting on some of the big stories in Canadian investing in 2013 and realized how the general sentiments among investors proved to be wrong, reinforcing my belief that following the financial media and the "common knowledge" of the herd is a recipe for less than stellar performance. Markets are not efficient and emotion, not sound reasoning, rules the herd.
> 
> Story 1 - Interest rates and dividend paying stocks and REITs
> In May of last year signals were sent by the Fed that interest rates would be going up, causing investors to promply ditch a lot of good investments because of a macroeconomic issue that was far from certain. Nearly a year later, the sell off proved to be a mistake as most of these stocks have recovered their losses. In fact, rates have really not moved since July of last year. I recall quite clearly the talking heads on Market Call calling for rates above 3 and 3.5% by this time.
> ...


You make some sensible points there. I believe DIY investors should work on developing their own strategic thinking so they can be equipped to assess what the talking heads say. It was very confusing for me in the beginning because of all the wrong calls, and contradictory predictions. 

Right now, it seems, the herd is enjoying substantial gains, and the minority lightened up on stocks. When the herd starts to exit in earnest, watch out.


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## rikk (May 28, 2012)

Big players will not tolerate uncertainty is my opinion ...


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## amitdi (May 31, 2012)

Over the last 2-3 yrs, I have been an investor - I am moving more and more towards rules based investing. Stories never live up to their hype...


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## blin10 (Jun 27, 2011)

yep you pretty much nailed it


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## Edgar (Mar 24, 2014)

Another example. BP Oil, after their spill, stocks dropped below 24 dollars, less than 6 months later, there stock was over 42 dollars.
Most companies can recoup from bad press imo


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## bds (Aug 13, 2013)

I bought into all 5 of these because they looked cheap at the time. I didn't take the time to look into what people were saying about them. I feel like a genius right now.


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## Just a Guy (Mar 27, 2012)

Personally, I often come out of my investing slumber whenever I hear such news...I see it as an opportunity to entre the market. 

When I hear about bad news, I look into the companies affected. If they look like solid companies, I buy some. Then I go back to sleep and wait for the next set of hysterical cries to wake me up.


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## Woz (Sep 5, 2013)

I agree with general sentiment that it’s best to ignore the “common knowledge”. However, to play devil’s advocate, is the reason those stocks rebounded because people overreacted? The market did very well last year and some of the examples given outperformed the market, while others underperformed. An argument could be made that the corrections were justified and that their rebound was simply a result of the overall rising tide of the market.


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## WillyA (Apr 14, 2011)

The Verizon one was the most surprising, even if they came I think people overestimated the impact they would have on the telecom market. Those are good examples though


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## My Own Advisor (Sep 24, 2012)

The more bad news for stocks, the better for buyers.

I also enjoy reading the bears when they beat up stocks, usually, only to find those same "experts" eating crow a few months later.


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## MoreMiles (Apr 20, 2011)

WillyA said:


> The Verizon one was the most surprising, even if they came I think people overestimated the impact they would have on the telecom market. Those are good examples though


Really, eh? 
Why would the Big-3 spend millions of dollars on advertising at that time to get public sympathy to block this "foreign invasion"? Over-reaction? I don't think so... those Big-3 wouldn't soil their pants if they did not think it was a big deal. Remember they were pushing for full page ad and prime tie radio / TV airtime to plead for help?

Hahaha... they got lucky, that's all. They could have been crushed like flies.

Now they turn around and stiff consumers this $120 / month cell phone plan non-sense!


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## londoncalling (Sep 17, 2011)

A (lengthy) video touching on some of what you are presenting 



http://www.youtube.com/watch?v=ntkNZSFAetU


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## Karlhungus (Oct 4, 2013)

Invest in companies with short term problems. BP is a great example.


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## MoreMiles (Apr 20, 2011)

Woz said:


> I agree with general sentiment that it’s best to ignore the “common knowledge”. However, to play devil’s advocate, is the reason those stocks rebounded because people overreacted? The market did very well last year and some of the examples given outperformed the market, while others underperformed. An argument could be made that the corrections were justified and that their rebound was simply a result of the overall rising tide of the market.


I found this on Mawer's blog... it presents a good point of view.

http://www.mawer.com/knowledge-centre/mawer-blog/engrained-truths/

You guys keep saying just ignore the noises, everything will be all right... really? Think deeper about it. We are in the middle of untested money-printing experiment, never ever happened before to this magnitude.. how can one be so certain of outcome? Is it right to get comfy and just buy the dips? Do all crashing stocks rebound? How about Blackberry, Yellow Pages, and Nortel? Do falling trees really make noises? You really have to sit down and rethink about these "truths".


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## Synergy (Mar 18, 2013)

^ thanks for the link. Funny guy - "no longer sending twits" - 8:42 :encouragement:


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## Just a Guy (Mar 27, 2012)

It's not really an "untested money-printing experiment"... Plenty of countries have tested it...the Weimar Republic, many African nations, South America, Mexico...

In fact, I'm currently reading "the downfall of money", which is quite an interesting look at Germany after the First World War...interesting reading.

Also, I don't think anyone ever said buy anything that goes down...I for one said to look at the company...I wouldn't have bought blackberry after the iPhone, nor yellow pages after the internet...as for Nortel, after talking to their customers where they paid you to buy their equipment, well...I avoided that one too...

However, the Canadian banks during 2007, the income trusts (had a lot to chose from) after they announced changes...in four years time...well, those were different...and proved most profitable.


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## Jon_Snow (May 20, 2009)

Story 1 - Loaded up on REITS when they tanked on Fed tapering talk. Haven't yet made a killing, but solid gains plus those juicy distributions.

Story 2 - Loaded up on BCE on Verizon rumour... nuff said.

Story 3 - Loaded up on POT cartel split. Making out like a bandit now. More than 5% divy too.

To sum up, I live for s*** like this. More please.


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## gibor365 (Apr 1, 2011)

Jon_Snow said:


> Story 1 - Loaded up on REITS when they tanked on Fed tapering talk. Haven't yet made a killing, but solid gains plus those juicy distributions.
> 
> Story 2 - Loaded up on BCE on Verizon rumour... nuff said.
> 
> ...


Similar here... 
1. but started buying REIT a little early
2. On VZ rumors added both BCE and RCI
3. Open POT position on cartel stuff
Also I like to buy dividend champions on small dips, like 2 moths ago with PEP, earlier with AT&T, PG, MO etc..
The only problem some of those champions dip very rare and insignificantly...
Happy that bought last year LMT when US wanted to cut military budget.... Just couldn't believe that country that 24/7 in war with somebody can really do it, so bought LMT $87.45 , now it's $161 and YOC is 6.1%... Too bad that didn't buy more...


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## donald (Apr 18, 2011)

gibor did you add to pm or just mo?pm was(recovered a bit now)getting hammered hard(e-cigs ect)i didn't buy last correction(mid 70's)
i am torn if cigs are really trending down long term of if all this bad press ect is real-even still p.morris makes $ hand over fist....was so tempted a couple mths ago.


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## gibor365 (Apr 1, 2011)

donald said:


> gibor did you add to pm or just mo?pm was(recovered a bit now)getting hammered hard(e-cigs ect)i didn't buy last correction(mid 70's)
> i am torn if cigs are really trending down long term of if all this bad press ect is real-even still p.morris makes $ hand over fist....was so tempted a couple mths ago.


Yes, PM also , but a bit earlier, last time I added about half year ago on dip.... definitely will buy more now, but it's one of my biggest holdings already...Actually now with p/e 16.2 it looks like cheapest from all tobacco stocks.... and I don't believe people will stop smoking, opposite people in emerging markets will buy more Malboro, because it's a brand name... you smoke Malboro , it's cool... lived in other countries and experienced it


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## donald (Apr 18, 2011)

I hold pm as well,though i do worry(slightly)but 'our' canadiana view is different over here obviously with the press and health care system ect!(and true you are a bit of a social misfit if you smoke now a days)
Hey if the canadian gov and tax payers didnt have to flip the bill for smokers later in life the gov wouldnt push as hard as they do(or companies losing money from employee smoker's in real time or on plans ect)
I also have read smoking(esp em markets)I still like it!just have not added.


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## gibor365 (Apr 1, 2011)

_'our' canadiana view is different over here _ it reminded me when we were in hotel in some small town in Czech Republic.... I asked reception girl where I can smoke (assuming that it should be some designated area inside or outside hotel), she looked at me like I'm alien and said "everywhere"


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## andrewf (Mar 1, 2010)

Hmmm... guess I should cross czech republic off my potential destination list. We really are spoiled in North America by the absence of smoking in buildings. It's really disgusting and offensive to be around.


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## Nemo2 (Mar 1, 2012)

andrewf said:


> Hmmm... guess I should cross czech republic off my potential destination list. We really are spoiled in North America by the absence of smoking in buildings. It's really disgusting and offensive to be around.


My lady suggested to HouseTrip, (and they implemented it almost immediately.....haven't used them for a wee while so don't know if it's still in effect), that they incorporate a "Non Smoking" field into their search parameters.......saves us time when looking for a place to stay.


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## gibor365 (Apr 1, 2011)

andrewf said:


> Hmmm... guess I should cross czech republic off my potential destination list. We really are spoiled in North America by the absence of smoking in buildings. It's really disgusting and offensive to be around.


Maybe it got changed now....who knows...  When I lived in Israel , as per my job duties, I visited a lot Hospitals and was surprised that people were allowed to smoke within hospital , in waiting room etc... but in late 90's it got changed.
To tell you the truth, even though I'm smoker by myself , I got relly disgust , for example, walking along Avenue des Champs-Élysées in Paris....so strong smell of tobacco and weeds everywhere.....


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## Feruk (Aug 15, 2012)

So how many of you were buyers of Sino Forest a few years ago?

I love buying on dips, just gotta be careful that those dips are recoverable.


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## financialuproar (Jan 26, 2010)

Feruk said:


> So how many of you were buyers of Sino Forest a few years ago?
> 
> I love buying on dips, just gotta be careful that those dips are recoverable.


I'm a contrarian investor. I live for that stuff. I own Blackberry, Reitmans, and other beaten up small caps most of you have never heard of. But it's not just as easy as buying stocks that are beaten up. For every Potash and BP that recovered there are just as many stocks that haven't. 

I bought Citigroup during the fall of 2008, at $120. That was something like 80% below the peak. That one didn't work out so well. Same with Sino Forest as Feruk said. There are more. We only focus on the ones that fell and then recovered. We forget about the ones that fall and stay in limbo for years.

Personally, I avoid companies with a lot of debt. Debt kills a turnaround. Cash in the bank gives a company options, plus makes it more attractive to be acquired.


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