Who? John Zechner, Chairman and chief investment officer, J. Zechner Associates Inc.
My Best Investment If I were to pick one stock alone that's had the greatest impact on our portfolio, it would be Research In Motion.
In our opinion, the company has been one of the great success stories in the Canadian market, generating an annualized rate of return of almost 40 per cent since it went public. Yet it continues to trade at a valuation that doesn't nearly reflect the strength of their product portfolio, the value of the BlackBerry brand and the inherent value of the relations they have established with almost all the major telecom companies in the world.
We met Jim Balsillie very early on in the process - just after they went public.
Many investors and analysts doubted the ultimate survivability of this company in the world of industry giants such as Nokia and Motorola, as well as some emerging players such as Palm. In our very first meeting, he said: "People don't understand that it's much easier to add voice to a data device than it is to add data to a voice device." That comment ended up being somewhat prophetic as we look at who have been the losers in the market since that time: Motorola, Ericsson and Nokia, to a degree, the companies that were trying to add e-mail or texting capability to their wireless phones.
Thinking of investing in RIM?
RIM, on the other hand, has continued to grow and become exceptionally profitable along the way.
But there's been a lot of cynicism all along, due in part to worries over competition, but also due to litigation issues the company's had to deal with on patents, including the payment to NTP of more than $600-million (U.S.) in early 2006 to settle a patent dispute that had threatened to cut off sales of the BlackBerry in the U.S.
The Return We bought a small position on the IPO (initial public offering) back in 1997. Although the stock increased in value from $7 (Canadian) to over $180 over the next 21/2 years during the technology boom, it subsequently crashed back down to under $30 when the tech bubble burst.
But from a split-adjusted value of $1.50 for the IPO, to [Feb. 23's]price of $72.20, the annualized return on the stock over that 12-year period, as I calculate it, has been a very impressive 38 per cent.
The stock has been in our portfolio at various weights over the past 12 years, usually between 1.5 per cent and 3 per cent of our total equity investments, or about $20-million to $40-million. Currently, it has a higher weight (around 5 per cent) since it is a larger part of the index and we feel its valuation is more attractive than it has been in some time.
The stock has performed exceptionally well over the long term. Obviously, it's a volatile stock, given the nature of its business and the sector that it's in - but when I think which stock has had the largest single impact on our portfolio over the last 12 years, RIM has been the one.
The Takeaway I think a growth-stock investment like this shows the importance of diversifying your sources of information and having a longer-term view.
Although we've maintained regular contact with the company, particularly in the early years, we've also listened to what RIM's competitors are saying, as well as its key customers, the global telecom carriers.
With a volatile stock like this, it's also important not to get too caught up in emotional short-term trading. Investors have had a real love-hate relationship with this stock, willingly paying over 30-times earnings when the growth momentum has been stronger and aggressively selling at as low as 12-times earnings when the competitive landscape looks more challenging or corporate developments, such as litigation, increase the risk.
In our opinion, investors also try to trade the stock too much in front of earnings reports. Everyone wants to own it if they beat the numbers, and sell it in case they miss expectations.
This strategy might work if you have some sense of how a particular quarter has shaped up relative to expectations, but the problem with a growth stock like this is that you might avoid the short-term move down from $70 to $64 on a "miss," but you also risk missing the stronger long-term move from $70 to $150, because investors tend not to want to pay $75 for a stock they may have recently sold at $70.
Do the work, know the investment, and then stick to your guns - update your knowledge of the company, but don't overtrade the stock.