Say what you want about market bubbles and irrational exuberance, but the stock market can be one smart cookie. That, at least, is one takeaway following Monday's news that BlackBerry Ltd. was no longer for sale following a collapsed deal between it and Fairfax Financial Holdings Ltd.
The market had suspected failure all along. Fairfax had offered to buy the struggling smart phone maker (with unnamed backers) for $4.7-billion (U.S.) or $9 a share. But BlackBerry's weak share price had suggested that the market never believed the deal – or a rival deal involving a number of other reported potential buyers – would happen.
Since the end of September, the shares never got higher than $8.38 in New York (based on market closing prices), which is about 7 per cent below the offering price in Fairfax's letter of intent.
Sure enough, the deal didn't happen. BlackBerry announced on Monday that it had failed to find a buyer, that it will instead raise $1-billion through convertible notes and that it replaced its chief executive, Thorsten Heins. BlackBerry shares fell below $7, down about 14 per cent in midday trading.
Chalk one up for the collective wisdom of investors, whose decision-making prowess isn't at all unusual. James Surowiecki praised group-think in his 2004 book "The Wisdom of Crowds," pointing out the surprising accuracy of the average guess on, say, how many jelly-beans are in a barrel.
The average investor also shows up in the performance of major stock market indexes, such as the S&P 500 – a benchmark that individual investors have a tough time beating in any given year, and find nearly impossible to beat over the longer term.
For sure, investors don't get it right all the time, and bubbles, crashes and speculative frenzies prove it. There are also relative unknowables – from devastating storms and terrorist attacks, to earnings shocks and surprise announcements – that can jolt markets.
But at the very least, market behaviour should give you something to think about when trying to decide if a takeover deal is going to fail (stock price is suspiciously low), a dividend is going to be cut (yield is suspiciously high) or a company's market share is about to slide (valuation is suspiciously modest).
This isn't always easy, of course. Individual investors are often imbued with overconfidence and can mistake decent luck in the short term with infallible long-term stock-picking skill, leading them to believe that the market is nothing but a dumb, lumbering beast.
Reuters (via Jason Zweig) reported on Monday that 57 per cent of U.S. actively managed mutual funds are beating their benchmark indexes this year, well above the usual 37 per cent outperformance (or, put another way, 63 per cent of funds usually fail to beat the index).
Reuters' interpretation: "It's a good time to be a stock-picker." That is, rather than rising as a bloc, stocks are diverging – and professional fund managers are proving themselves adept at picking the leaders and avoiding the laggards. Well, for now.
One way to side with the collective wisdom of the market is to simply buy-and-hold an index fund that tracks a major benchmark such as the S&P 500 or the S&P/TSX composite index. This year aside, indexes beat the vast majority of mutual funds and independent investors over the longer term.
And if the market doesn't get too excited about prospective BlackBerry takeovers, neither will you.