{"id":4395,"date":"2011-06-18T05:02:42","date_gmt":"2011-06-18T11:02:42","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=4395"},"modified":"2018-09-21T02:05:59","modified_gmt":"2018-09-21T06:05:59","slug":"research-in-motion-a-case-study-revisited","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2011\/06\/18\/research-in-motion-a-case-study-revisited\/","title":{"rendered":"Research In Motion, A Case Study Revisited"},"content":{"rendered":"<p><span style=\"font-size: 16px;\"><a href=\"https:\/\/jasonapollovoss.com\/web2011\/06\/17\/what-my-intuition-tells-me-now-research-in-motion-intuitive-investing-case-study\/\" target=\"_blank\" rel=\"noopener\">Yesterday I used Research In Motion as a case study<\/a> for several of the tools I share in my book, <a href=\"https:\/\/jasonapollovoss.com\/webbook\" target=\"_blank\" rel=\"noopener\">The Intuitive Investor: A Radical Guide for Manifesting Wealth<\/a>.\u00a0 But wait, there&#8217;s more!<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Specifically, I wanted to talk today about:<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">How &#8220;the market&#8221; is often representative of the extreme inclinations of several investors, and not necessarily every single investor<\/span><\/li>\n<li><span style=\"font-size: 16px;\">The asymmetry between market rises and market falls<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\">Let&#8217;s take these in turn.<\/span><\/p>\n<p><span style=\"font-size: 16px;\"><strong>The &#8220;Market&#8221;<\/strong><\/span><\/p>\n<p><span style=\"font-size: 16px;\">Yesterday it was widely reported that Research In Motion&#8217;s (ticker: RIMM) sixth largest shareholder, Jarislowsky Fraser Limited (JFL), liquidated half of its position in the Canadian maker of Blackberry smartphones.\u00a0 Furthermore, their chairman stated, <a href=\"http:\/\/www.bloomberg.com\/news\/2011-06-17\/rim-s-sixth-biggest-investor-jarislowsky-sold-half-its-stake.html\" target=\"_blank\" rel=\"noopener\">&#8220;We are on the way out.\u00a0 The stake has been reduced by more than 50% or even more.&#8221;<\/a><\/span><\/p>\n<p><span style=\"font-size: 16px;\">As of 31 March, 2011 JFL had held 10.2 million shares of Research In Motion.\u00a0 So presumably the firm sold approximately 5.1 million shares on 17 June, 2011.\u00a0 If so, that firm&#8217;s trading accounted for just 4.5% of total volume, or 4.5% = 5,100,000 JFL shares sold <strong>\u00f7<\/strong> 113,269,745 total shares traded Friday.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Not only that, but yesterday&#8217;s gigantic trading volume was actually small when compared to the maximum trading volume in RIMM shares which took place back on 23 December, 2003 when a gigantic 350,252,400 shares changed hands.\u00a0 So Friday&#8217;s volume was only 32.3% as large as the largest volume trading day in Research In Motion&#8217;s history, but still was able to take down RIMM shares by 21.5%!<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Importantly, share prices on stock exchanges are often determined at the margin.\u00a0 That is, there typically is tremendous price stability.\u00a0 But when a single shareholder wants out of a position badly and is willing to accept any bid for its shares, then a single seller at the margins can set the entire market&#8217;s price.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">This important point is scalable.\u00a0 During the height of the dot.com era, when there was rabid buying and selling, the nightly business news (as it always does) would report &#8220;how the market did today.&#8221;\u00a0 I had an intern of mine (hello Matt Schildt) conduct a piece of fascinating research to see just what &#8220;the market&#8221; meant.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">He calculated average trading volumes for the S&amp;P 500 during the period to total shares outstanding for the components of the S&amp;P 500 stock index.\u00a0 It turned out that &#8220;the market&#8221; only translated into 0.7% of total shares outstanding being traded, on average, each day!<\/span><\/p>\n<p><span style=\"font-size: 16px;\">This is hardly the vision most of us have when we hear the nightly business news.\u00a0 The impression given is that everyone and his brother-in-law trades each day.\u00a0 My point?\u00a0 That a minority of shareholders each day actually determine the market price that the rest of us have to live with.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">With Research In Motion, only a few important shareholders bailing likely tanked the price of RIMM for everyone.\u00a0 It is important to note that a large shareholder may not be selling for a fundamental reason.\u00a0 That is, their trading may have nothing to do with the news.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Yesterday Research In Motion <strong>did<\/strong> announce bad news, so the sixth largest shareholder selling was related to an actual story.\u00a0 But frequently large shareholders sell shares in a business because they simply change investment strategies.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">For example, they may sell RIMM because they want to &#8220;underweight tech&#8221; and &#8220;overweight manufacturing.&#8221;\u00a0 If so, that selling would represent a mysterious drop in the share price of a company.\u00a0 Such price declines, unrelated to news, are price distortions in the marketplace and are very often buying opportunities.<\/span><\/p>\n<p><span style=\"font-size: 16px;\"><strong>Asymmetric Rises vs. Falls<\/strong><\/span><\/p>\n<p><span style=\"font-size: 16px;\">Research In Motion also serves as a nice case study for how long it takes to create value in stocks versus how rapidly value can be destroyed.\u00a0 Yesterday I documented RIMM&#8217;s rise from $1.92 adjusted (for stock splits) closing price on 4 February, 1999 to a peak price on 19 June, 2008 of $147.55.\u00a0 That ascent took 9.37 years.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">By comparison, as of the close yesterday RIMM shares had fallen 81.2%, losing over four fifths of their maximum value.\u00a0 And how long did this take?\u00a0 Only a scant 2.99 years!<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Another way of looking at it is: how long ago was it that Research In Motion shares traded as low as they did Friday?\u00a0 You have to go back to 14 March, 2006 when the closing price that day was $27.66.\u00a0 Even during the heart of the Great Recession RIMM shares did not trade below this price!\u00a0 So in 2.99 years 5.26 years of value creation was eliminated.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">So we can create an asymmetry ratio that demonstrates just how much longer it takes to create value than to destroy it:<\/span><\/p>\n<p style=\"padding-left: 30px;\"><span style=\"font-size: 16px;\">Value creation \u00f7 value destruction = asymmetry ratio<\/span><\/p>\n<p style=\"padding-left: 30px;\"><span style=\"font-size: 16px;\">5.26 years \u00f7 2.99 years = 1.76x<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Let&#8217;s have some fun and run the asymmetry ratio for the S&amp;P 500 during a full market cycle, that is from trough to peak to trough again.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">On 24 March, 2000 the S&amp;P 500 hit a high of 1,527.46 and it was all down hill until it reached a trough on 9 October, 2002 of 776.76.\u00a0 That decline from peak to trough took 2.54 years.\u00a0 But how many years had it taken to rise up to that 1,527.46 level?\u00a0 On 28 April, 1997 the S&amp;P 500 closed at a level of 772.96.\u00a0 So the ascent up to 1,527.46 took 2.90 years.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">So our asymmetry ratio for the period of 28 April, 1997 to 24 March, 2000 would be: 1.14x = 2.90 years of ascent \u00f7 2.54 years of decline.\u00a0 This is one market cycle, and an unusually low one at that, so let&#8217;s take a look at several others.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">How long did it take the S&amp;P 500 to regain that level of 1,527.46?\u00a0 On 6 July, 2007 it closed at 1,530.44 and finally exceeded the level it had established 7.28 years earlier!\u00a0 So our asymmetry ratio here is 7.28 years \u00f7 2.54 years = 2.9x.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">On 9 October, 2007 the S&amp;P 500 hit an all time high when it closed at 1,565.15.\u00a0 So it took 4.74 years to rise to this level from the previous low of 9 October, 2002.\u00a0 Then the S&amp;P 500 experienced a cyclical low on 9 March, 2009 when it closed at 676.53, or a period of 1.42 years.\u00a0 That gives us an asymmetry ratio of 3.4x!<\/span><\/p>\n<p><span style=\"font-size: 16px;\">The average of these three asymmetry ratios is: 2.48x.\u00a0 Another way of putting this is that market declines are 248% faster than ascents.\u00a0 Since percentages are often difficult to understand for people consider that if you climb the investment hill at 60 miles per hour, you descend it at approximately 150 miles per hour.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">I hope that this amply illustrates that it usually takes much more time to create value than it does to destroy value.\u00a0 Keep this is mind in the future if you are tempted to invest in a certifiable Rocket Ship, like Research In Motion!<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Jason<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Yesterday I used Research In Motion as a case study for several of the tools I share in my book, The Intuitive Investor: A Radical Guide for Manifesting Wealth.\u00a0 But wait, there&#8217;s more! Specifically, I wanted to talk today about: How &#8220;the market&#8221; is often representative of the extreme inclinations of several investors, and not [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[3],"tags":[],"class_list":["post-4395","post","type-post","status-publish","format-standard","hentry","category-the-blog"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/4395","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=4395"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/4395\/revisions"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=4395"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=4395"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=4395"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}