We’ve received a handful of phone calls from clients asking if they should purchase some Boeing stock in the wake of the recent grounding of the 737 MAX 8 aircraft. The stock price declined nearly 12% over a two-day period from Monday, March 11th through Tuesday, March 12th, falling from $422.54/share to $375.41/share.1 As of this writing, the stock has continued to fall into the mid-360s range.
It is only natural for bargain-hunting investors to ask if it is a good time to buy. The broader question is, should investors take a risk and buy Boeing stock, or any other individual stock that experiences a dramatic decline?
I always answer this question with a set of my own questions:
Where does the investment fit into the overall portfolio strategy?
As our clients already know, our portfolios are built using institutional mutual funds and exchange traded funds to help us achieve a truly diversified investment mix. So, in general, we don’t include individual stocks in our portfolios.
Boeing’s decline provides a great example of the risk associated with holding a large position in a single company’s stock. Prior to the grounding of these aircraft, I think most market observers would say that Boeing is a strong, stable, financially sound company. That may still be the case. But events like this highlight the fact that even strong, stable, financially sound companies can be negatively impacted by unpredictable events.
This is where mutual funds and exchange traded funds have the advantage. Even if Boeing stock is held in a fund, its decline won’t sink the whole ship.
So, we start by acknowledging that an individual stock doesn’t really fit into the overall portfolio strategy. Rather it is a speculative purchase aimed at taking advantage of a (hopefully) short-term loss in value. If an investor wants to own a stock as a speculative purchase, then we must ask the second question:
How much do you plan to buy?
Most clients who ask about buying an individual stock are thinking about a relatively small investment when compared to their total investable assets. They usually recognize the that the purchase is speculative in nature, and there can even be an element of entertainment in the buy. I’ve had many people say things like, “I’d just kinda like to buy a stock and see what happens.”
If that is the case, our recommendation would generally be to buy a small amount relative to the overall portfolio value. This means that the stock won’t have a huge impact on the investor’s net worth, for good or for bad.
What is your exit strategy?
Most serious stock pickers try to arrive at an estimate of a stock’s “intrinsic value,” or worth based on fundamental analysis. They will then plan to sell the stock once its market price reaches that intrinsic value. This requires an analysis of a company’s prospects for earnings and dividends and some fun math:2
Div = Dividends expected in one period
r = Required rate of return
Most casual investors don’t have the time, experience or expertise to perform such an analysis on the stock they’re considering. Even then, unpredictable events (like the grounding of an aircraft) can throw the assumptions off. Absent such analysis, what is your exit strategy? When will the time be right to sell the stock, whether things improve and the stock goes up, or, horror of horrors, things go wrong and the stock continues to slide?
In summary, I really don’t know if investors should “take a flyer” on Boeing stock. I don’t think anyone can honestly say they know how this situation will play out. Here the wisdom of Mark Twain may be instructive:
“There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can.”