Pot Shots

Canopy Growth, BRP, and Air Canada lead the list of stocks that you should have owned last year but probably didn't. What do they have in common? Nothing, in terms of business direction but they all had reasons not to own them. They suffered from preconceived opinions. Investors have always had trouble getting over strongly held opinions that keep them from being objective and rational. It's as if people think: "Don't let the facts get in the way of a good opinion".

Your humble blogger has always tried to keep objectivity at the centre of the decision-making process. I recall being a bit of a contrarian as far back as grade school. In 8th grade, I participated in a formal class debate on the topic of legalization of marijuana. I of course took the 'pro' side of the debate, offering a rational set of arguments on the positive societal benefits of decriminalization of cannabis. Never having used the substance, let alone even seen it, didn't stop me from forming this opinion. I argued that, under government control, the drug could be monitored for quality, potency and removal of the criminal element was a major benefit. My debate opponents argued that governments would never allow it to be legal. This was in 1967!

I just let the rational arguments lead me to the conclusion. In the opinion of the class however, I lost the debate. The social pressure was too strong for my classmates to hear the arguments objectively. They had no way of overcoming their preconceived notions. Lesson learned.

Canopy Growth, the best performing stock on the TSX in 2017, rose on the news of an investment by Constellation Brands, the multinational beverage company that has brought you the likes of Corona beer. This was days after a breathless headline on BNN blared "You're gonna lose all your money". There was no analysis from the talking head who made this pronouncement, just an unsubstantiated blanket statement which spuriously compared it to the 'Internet Bubble". It became the most read story on BNN last year. He may ultimately be right, but talk about pissing into the wind!

BRP, the recreational products company that was spun out of Bombardier, has been a sleeper success as well. Initially, many were sceptical of another 'Quebec based' family run business IPO. Despite having industry leading brands and streamlined efficient operations, the controlled, multiple vote structure initially kept the multiple aberrantly low. The well publicized issues that plagued it's parent, Bombardier didn't help either. Too many investors had been burned by this family run conglomerate. Never again! Only when BRP reported a string of good earnings, a buy-back and an initial dividend did the stock react strongly.

But the ultimate example of preconceived opinions has to be the airline business. In the past 70 plus years, there has always been a vicious boom-bust cycle in the airline business. This lead to the acceptance of an oft-repeated 'truism' that 'equity investors never make money in airlines'. For many years that was mostly true. Warren Buffet was widely quoted as say so many times. It must be true!

I do remember getting taken out of my Wardair stock in 1989 at a massive premium, but that was dismissed as a fluke by the pundits.

Without a doubt, the best stock pick of my career was Air Canada. I started accumulating the stock for my clients in 2012 at around $1 per share, ultimately amassing a position that was fully 8% of the company. I saw it as a low cost option on an improving economy, once the financial markets had stabilized following the financial crisis. It helped that I personally knew the management who had been brought in to 'fix' the company and trusted in them to make the tough decisions that would improve the company.

Our new analyst at the time who had been tasked to add quantitative rigour to the management of the portfolio was highly skeptical of the Air Canada position, and for good reason. Bad estimate revision, bad balance sheet, bad price momentum....just plain bad! Most analysts were unwilling to believe the transformation that was about to occur. To be honest, I was a bit doubtful myself, having seen the company nearly go down the tubes twice before, in the late eighties and more recently during the 2008 melt-down.

In the five years that followed, the company was resurrected and transformed in an environment that supported a new era of stability in cost structure, demand and competitive behaviour. Air Canada was a 25 bagger. Even Buffett bought airlines. Never indeed!

For each of the positive outcome war stories I list above, there is a blow-up version that I can point to as well. Nortel, Noble China Brewery, Bre-X, and more companies that I have conveniently forgotten, litter the battleground of my investment lifetime. The list is too painful to complete. The scar tissue too rough.

But succumbing to a loss of objectivity, based on past investment screw-ups, is one of investors' most common mistakes. Human nature is a powerful force to reckon with. Once bitten twice shy. Overcoming that behavioural fault is the key to remaining objective. Easier said than done, but never more important than at this point in the investment cycle. Your not gonna make money with the consensus.

So take a few pot shots, like $WEED, and enjoy the bull market while it lasts.

Equity Model: 3/5 - Risk On

A massive feel-good vibe is now pervasive in the markets. The AAII Bull/Bear ratio has soared to a three year high in last minute melt up of sentiment. The VIX was jacked up by a last hour year-end market sell-off on Friday, but is retreating this morning. Copper is leading gold as they both rally - a good sign. The month of January is sometimes seen as a bell-weather of the year ahead but the track record has been mixed as of late. Stay with the trend for now.