Why you shouldn't listen to me... Someone wrote me awhile back asking if I thought Bombardier was fairly valued here. I don't check my messages very often and that poster may have moved on to other things, but if he reads this he'll know who he is. After composing my response, I thought I might as well share it with the rest of you for what it is worth. Thanks for asking my thoughts. I've written a lot on this topic over the years but I realize it isn't easy to page back any distance for previous posts - even if many of those posts remain relevant.
What's a "fair price" is always a matter of opinion. The price of anything is said to be determined by supply and demand. The market just takes the buy and sell orders and tallies them up. Most buys and sells cancel each other out. The excess is what creates the movement in either direction. When there's more optimistic sentiment, the stock rises, when there's more negative sentiment, it falls.
What many investors miss is the idea that perceived value isn't real, or intrinsic value. Perceived value is what you can buy the shares for today. Intrinsic value is what the shares will move towards over time as more information comes out allowing investors to revise their analysis of the company.
You'll hear a lot of people say they know what a company is worth. That's because they know most people want to hear someone who seems to know what he is talking about. But in reality, no one knows. They couldn't possibly. Because they can't factor in all the possible issues that will arise in the years ahead as supply and demand for the company's products ebbs and flows over time.
We can't count on numbers because numbers only factor in what's already transpired. There will be both positive and negative events ahead. Investors try to weigh these events each day. Some make better estimates than others, but none can guess what surprises are in store for any company, its industry, or its products.
So, it's all a big guessing game, with luck being a big factor. All we can really do as investors is try to pick reasonably honest management that has demonstrated some innovative capacity. Compare top quality companies, and try to find consistent performers. Good quality companies can run into difficulties, but don't usually become badly quality companies overnight.
In my view it's worth paying a premium for quality. We shouldn't buy anything just because it seems cheap. Of course, I believe Bombardier offers investors good quality at a reasonable price. But then I'm a sucker for airplanes, and you shouldn't place much value on what I say because I have a vested interest which probably distorts my thinking.
It won't be smooth sailing from here. Bombardier has seen a lot of turbulence in recent years and chances seem pretty good it will see more. It's a high risk/high reward situation. Most small investors don't need that much excitement in their lives. Bombardier will be a roller-coaster ride rough enough to shake out even the most stout-hearded of investors.
Leave the high-risk stuff to institutional investors. As with most high-profile companies, Bombardier is about 80% institutional ownership (that's a rough figure that moves around a bit over time). Most small investors don't have the stomach for such a rough ride. They may start out with good intentions, telling themselves they'll stick with it come he'll or high water, but then when they see the value of their precious savings cut in half they're ready to throw in the towel.
Individual investors should stick with some mix of index funds with a small percentage of steady stalwarts. Look for stocks sthat are rated highly for safety, and consistency of performance.