One of the student stock picks that I immediately warmed to was Boeing (BA), so I didn’t hesitate to allocate a fair amount of the portfolio to this dividend-yielding stock.
Then this happened. The controversial and previously error-prone 787 Dreamliner had caused BA to fall in the past, and that’s exactly what happened on Friday. Had I executed the trade a couple hours later, BA stock would’ve been about 6% cheaper. In investing, you quickly learn that timing is everything.
But the Dreamliner fires bring up the larger and more fundamental question of whether the BA long position was warranted in the first place, which is why you saw volumes spike at the end of Friday’s trading session, as investors weighed the discount of the new price point with the possibility that more Dreamliner problems could devastate the company going forward.
The question on every Boeing stockholder’s mind late Friday was: do I sell or do I buy more? How do I know what is the right choice?
How PMs Respond to Bad News
The first thing to remember in a case like this is that you have new information. Going into a long or short of BA, you should know all about the battery problems with the Dreamliners in the past, and the potential implications for BA in the future. Now two new fires changes the equation–but does it change your initial investment hypothesis?
A couple of additional news stories also need to be considered. For one, an initial investigation said the fires weren’t related to the planes’ batteries. Great news for those long in BA. But, a deeper probe is still on the way, and this is a risk factor that investors will have to live with for now.
On the other hand, airliners aren’t abandoning the Dreamliner yet. This is largely why BA is up on Monday, and may likely recover, and this is partly why I doubled the student portfolio’s stake in the name.
A PM’s job is to assess if new developments change the investment hypothesis, and in this case the answer is a provisional “no.” The hypothesis rested on a high demand for BA’s products and the growth of the market that BA’s customers profit from: travel. The fires do not change that hypothesis, especially if an initial inquiry suggests they are unrelated to the batteries.
With a drop in price largely unrelated to the initial investment hypothesis, an investor needs to stay true to the hypothesis, and consider whether the drop represents an opportunity to increase exposure. If the investor deems that the risk/reward quotient is skewed more towards reward by temporary fear in the marketplace, there is an opportunity to make money.
Of course, as Keynes famously said, “markets can remain irrational longer than you can remain solvent.” The question is whether this is the case with BA right now or not. Considering the general macroeconomic optimism in the market, irrational fear is unlikely to remain in place for a stable large-cap stock like BA, but market attitudes can always change very fast.