Research In Motion, Intuitive Investing Case Study

Research In Motion, the Canadian maker of Blackberry phones, serves as a very nice case study for many of the elements of my book, The Intuitive Investor: A Radical Guide for Manifesting Wealth.  But today I want to focus on just several of those elements; specifically: Archetypes Are No Substitute For Analysis.

In case you haven’t heard the firm has gone from hero to zero over the last year.  In fact, since the beginning of the year shares of Research In Motion (ticker: RIMM) have fallen 39.8% = ($35.33 yesterday’s close ÷ $58.69 this year’s open) – 1.

HERO

RIMM shares began trading 4 February, 1999 and had an adjusted (for stock splits) close of $1.92 that day.  Shares in Research In Motion then soared to an all time high of $147.55 at the close of trading 19 June, 2008.  That appreciation is clearly enormous, clocking in at a whopping 7,584.9%!  On an annualized basis that return translates into a 58.9% compound annual growth rate over that 9.37 year period.  Wow!

Let me excerpt a part of my book, The Intuitive Investor, to describe this period in investment archetype terms.  Consider this to be an incentive to buy the book!

“Archetypes are generic, idealized models of persons or of concepts.  They are patterns of behavior and appearance that serve as molds for personalities and for understanding.

“Let’s discuss an example of an archetype.  In most action films who is the protagonist?  It’s the loner hero who is an ex-special forces soldier who is reliably called upon to do the right thing in a time of crisis.  This is a classic archetype and we all recognize him.  Importantly, there are many other archetypes.

“The benefit of archetypes in life is that they aid in communicating lots of information quickly about a subject without having to do much analysis.  The brain seems hard-wired when meeting new people to quickly assess the person and to determine with which archetype the new acquaintance most resonates.  For example, when talking about a friend, you might say, “I have a friend Bob who is a Perpetual Bachelor…”  As soon as your listener hears you say, “Perpetual Bachelor,” he or she pretty much knows Bob.  One probably doesn’t need to hear any more stories about Bob to determine how he will react in certain situations either.  So archetypes aid in the speedy conveyance of information and sometimes they aid in understanding.  But the problem is that archetypes are generalities and they obscure as much as they reveal.  Archetypes are not a substitute for real analysis.  For example, what if Bob is not a Perpetual Bachelor but is instead impotent?  In this situation the assessment of Bob is obviously incorrect.

“Most people identify with an archetype and modify their behavior and appearance to conform to one.  Someone might choose to be the guy who buys a Harley Davidson motorcycle in his late 30s or early 40s and now goes riding on the weekends.  Or someone might be the suburban yogini who rarely misses the chance to roll out the yoga mat.  Someone might now be the straight gal or guy that never does the things that got them into trouble as a sorority sister/fraternity brother.  Whatever archetype is chosen, most people adopt the permissible behaviors and appearance of their chosen archetype fully.

“Trusting in archetypes is not usually costly when you choose how you present yourself to the world, or assess a new acquaintance or watch a movie.  But in investing trusting archetypes is deadly to your investment returns.  It’s essential to conduct analysis of reality not psychological phantoms.”

RIMM was an investment archetype that I refer to in The Intuitive Investor as The Rocket Ship.

“The Rocket Ship is the hot growth company that has a new product that serves a new and quickly growing market.  It is primarily characterized by the word EXCITEMENT.  These businesses receive lots of attention from investors in the form of an ever increasing stock price.  Price fluctuations are extremely sensitive to news – ANY NEWS; as well as, attention in the form of gossip.  You know these companies well, don’t you?  If there is positive news then there is lift off in the share prices.  If there is negative news then there is melt down in the share prices.

“Often Rocket Ship businesses occupy a disproportionate share of the evening business show’s news flow.  You hear the names of these companies and of their executives, as well as the companies’ stories talked-up in coffee houses, in taxi cabs, and by your friends and relatives.  For a business to be widely gossiped about, it is a good sign that the business is a Rocket Ship.  There is a mythic quality to the story of the Rocket Ship that is similar to the fascination people have with this season’s “great sports team” or this season’s “hot celebrity.”

“The problem is that rocket ships almost always disintegrate in the atmosphere on their ascent to the heavens of fall back to earth.  The excitement surrounding the Rocket Ships causes investors to ignore obvious and pertinent data about the business that otherwise would cause them to not invest.  For example, the “hot market” whose product the Rocket Ship manufactures for is not really growing as fast as people anticipated.  Or the “hot market” has many new Rockets launching simultaneously.  Or the astronaut-executives don’t know how to stabilize the flight of the Rocket company and they themselves prepare to abandon the ship and its passengers.  Or the Rocket company is not built that well and the higher it flies the more strain is put on it.

“The company you are examining may fit the archetype of the Rocket Ship well, but like most generalities, they fail at the margins.  That is, archetypes fail to describe issues unique to a business, ones that determine whether the business turns out to be a good investment or not.”

I feel that RIMM was a near perfect Rocket Ship investment archetype, complete with a fall back to Earth starting 20 June, 2008 and continuing through to this morning’s decline and very active trading.

The problem is that there have been signs all along the way that RIMM was going to run into trouble, but the press, the public and investors had convinced themselves that RIMM was a Rocket Ship.  Specific to my description of the Rocket Ship “…the ‘hot market’ [had] many new Rockets launching simultaneously.”  Here I am referring to Apple and Google and all of the manufacturers of smart phones.

There was a time when Blackberry was the only platform that allowed you to remotely receive your e-mails and that had a full fledged keyboard so that you could type out messages.  This accounted for the liftoff in RIMM’s share price.  But money moves fast in capitalist economies and minds move even faster – so stiff competition materialized and RIMM is de-materializing.

ZERO

Subsequent to that massive Rocket Ship ascent in share value the company has fallen back to earth.  In fact, shares have fallen, on an absolute basis 76.1% = ($35.33 yesterday’s close ÷ $147.55 all time high) – 1.  In other words, it has lost three quarters of its value in just three short years!  On an annualized basis that return translates into a -38.0% compound annual growth rate over that 2.99 year period.  Wow and ouch!

Let me excerpt a part of my book, The Intuitive Investor, to describe this period in investment archetype terms.

“Just as the Rocket Ship has its extreme version, as the Immortal One, there is an extreme case for Old Ironsides, too, as the Plague Company.  This company is diseased and about to die.  Investors avert their eyes from the Plague Company because it is painful to look at and they don’t want to “get any of it on ’em” lest their investment portfolios implode.  The Plague Company can do no right and is the butt of investors’ jokes and the target of ridicule from most of the investment community, including professional investors, investment news providers, and academics.  The academics might talk of using the Plague Company as a case study for business school students of how not to run a business.

“The danger of course, is the Plague Company may not be terminally ill, but just going through a period of severe illness.  There are whole and famous investment careers founded on the identification and pursuit of Plague Companies.  You can bet that if the news about a company includes a discussion of “emergency financing,” a “white knight,” or the firm being on its “last legs,” it must be a Plague Company.  Like the Immortal Ones, you are careful with the Plague Company.  This is because price declines can be sharp, sudden, and frequent until the Plague Company stabilizes its health.  Scrutinize, and do not stereotype.”

I think that you will agree with me that RIMM no occupies a place in the average investor’s mindset of The Plague Company.  In fact, just yesterday the firm’s sixth largest shareholder sold more than half of his position and stated publicly his intent to fully exit his position.  Clearly, he doesn’t “want to get any of it on ’em.”

Where will Research In Motion end up?  It really isn’t important to the discussion.  What is important is to recognize that both in RIMM’s ascent and its subsequent descent that people, even professional investors, stopped doing their analysis.  Instead they had subconsciously ascribed a character to Research In Motion.  At that point investors began relating to RIMM, not as a business deserving of scrutiny, but as a person that they could relate to.  Ouch!

I hope that this was helpful.

Jason