Quick! Pop quiz! Pencils out, cell phones in your pocket. This quiz only has one question and you have 20 seconds to answer.
United Airlines (owed by United Continental Holdings) has had a roller-coaster of epic fails the past week. After seeing the unfortunate video of the man being dragged off the United flight, do you believe United Airlines is a company you would consider investing in over the next two months?
Ok, pencils down. Let’s check everyone’s answers.
Oooooo, wow, interesting. It seems that 95% of the class says they would NOT consider investing in United’s stock right now.
Sorry everyone. Looks like the majority of you failed the test.
You are wrong for two reasons:
- You are making an assumption about a company you likely haven’t done a single bit of research on.
- You are making an assumption that “headline risk” will have a significant long term affect on United Continental Holding’s ability to generate profits.
Ok, ok, so maybe you are that person who doesn’t care to look into United due to a moral perspective. If that is your reasoning, it is completely accurate not to have any desire to look into investing in the company. When investing goes against a moral view, you take a pass on the investment. However, most people who steer clear of United Continental Holdings (UAL) won’t be doing so based on morals; they will be doing so based on fear.
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I’m not telling you to buy United Contenintal Holdings
I want to make something clear. I’m not saying you should go out and buy stock in United. I’m not saying United is a stock to sell, nor am I saying it is a stock to hold. In fact, I haven’t done a single bit of research on United. All I am trying to get across is that you have a preconceived notion that negative headlines equal risk but you are forgetting about price; you are thinking of investing all wrong.
Change the way you think
When it comes to investing in companies, you should remember the advice of the wonderful wizard of Omaha, Warren Buffett. He once said you should be “Fearful when others are greedy and greedy when others are fearful”. Stock market prices fluctuate because people are emotional and erratic.
One day everyone loves a company. The the next day they hate it. The next quarter they love it all over again.
The trick is, finding a great company and waiting for the erratic emotional investors to start hating that stock.
Price is extremely important
Let me ask you a question (don’t worry, there won’t be another pop quiz).
Do you get excited when you go buy milk and it increases in value by 10%? How about when you go to Starbucks to buy a latte? Do you get all happy and giggly when Starbucks increases the price of a latte by 10%? Do you think to yourself, “Wow, this latte is, like, 10% better now…I need to buy this latte and get in on the action”?
Of course you don’t think like that; you want to buy products on the cheap and a 10% increase pisses you off. So why then do you suddenly think a company is a great company to invest in when it goes up 10%? It makes no sense; and for what happened with United Airlines you just got a potential Easter sale.
News organizations like drama
I read a hilarious article this week about Warren Buffett’s investment in United Airlines. It was not meant to be a hilarious article; it was hilarious because it assumes Buffett is deeply affected with United’s PR nightmare. Take the title for example, “Warren Buffett’s Big Bet on United Airlines Could be Costing him Millions”. It comes with a picture of Buffett holding his head like he is in a Homer Simpson D’oh! Moment.
An article like this creates the illusion of a giant problem for Buffett. This particular part of the “illusion” is hilarious:
Buffett may now be regretting the big bet he made on airlines at the end of last year. United’s stock has lost $2.17, or 3%, year to date, which could be costing Buffett $62.8 million.
Bahahahahahah. Warren H. Buffett, billionaire extraordinaire, is going to be “regretting” his united investment due to a short term snafu? The hilarity. Let’s go over a few numbers so you understand why this is ridiculous:
- Warren Buffett’s company, Berkshire Hathaway (BRK.A), owns shares in United Continental Holdings (UAL).
- Berkshire Hathaway made a profit of over $24 BILLION in 2016.
- Today, Berkshire Hathaway has a market value of over $400 BILLION.
- Warren Buffett’s net worth is over $70 BILLION.
All of these should point you to the realization that Buffett doesn’t care about little blips like $62.8 million. If he did, he wouldn’t be worth over $70 billion.
While Buffett may be personally affected by the video of the man who was dragged off the plane, his faith in his investment hasn’t changed one iota because of it. Do you think $62.8 million makes a difference to a company generating over $24 billion annually in profit? A company with a market cap is over $400 billion? If anything, Buffett is happy to watch United Continental Holding’s price drop if he believes it is still a quality company to invest in.
Don’t make the mistake of thinking something like what happened to United matters to someone who is a long-term investor like Buffett.
Embrace the drama
In closing, you should embrace the drama the news brings to companies. It will give you the ability to see through the emotional erratic behavior of the majority of investors, and potentially find the right company at a great price.
So change the way you think when it comes to investing, and don’t make assumptions about companies without researching them. If you read into a company and don’t understand it or believe it to be a potential investment, move on the the next one.
Remember, in times like United, when everyone is fearful, it is potentially a time to be greedy. Just do your research and figure out if it is or is not.
Anyone disagree with me? Anyone think it is a wast of time researching companies dealing with negative headlines?