Blackberry’s Decline is an Instructive Story about the Difference Between Investing and Speculating
Since 2008, Blackberry’s stock declined from $140 to less than $8 as the company repeatedly delayed the release of its new handsets. During that time, we were often asked if we thought the stock was a good buy. Our response to that question is a good way to explain the principles behind value investing, as well as the difference between investing and speculating.
Based on decades of experience, we have found that our three-part value investing strategy is the best way to reduce risk and volatility and earn consistent returns over time:
- Appraise the intrinsic value of each company over a business cycle;
- Seek long-term growth of capital by investing in companies that are undervalued;
- Utilize a margin of safety to promote return of capital…not just return on capital.
In order to do that, we do look a range of financial ratios including price/earnings ratio, price to book value and debt coverage. Over a 5 to 10 year period, we want to see growth in revenues, earnings and dividends. As well as financial data, we look at the skills of the management team, the products the company makes and the markets it serves.
When we looked at Blackberry (or Research in Motion as it was then known,) we saw a business with significant revenues, a large cash reserve and a strong customer base. However, when we looked at the company’s products, it was clear that its current offerings were out of date and that the launch date of its new devices was receding into the future. Most significantly, we were observing an industry undergoing rapid transformational change. New paradigms were emerging as the industry structure evolved to serve different markets with newer technology. This shift made reasonable predictions of future direction futile. In that environment, we could not make future projections for revenue or earnings with any degree of confidence and therefore did not recommend the stock as a buy.
So, here is the difference between investing and speculating: in our view, investing is about buying shares in businesses that you believe will grow over time and reward patient investors with incremental dividend growth and modest capital appreciation. Buying Blackberry was in our view, pure speculation: a bet as to whether consumers would embrace their new handsets when the eventually came to market. Unfortunately, that bet has not turned out well for Blackberry investors.
Another nail in the Blackberry coffin: Rogers won’t stock new Z30 phone when it’s released later this month
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