The most vivid memory I have of the powerful phenomenon of peer pressure dates back to the late 1990s, early 2000s, and concerns more specifically the darling stock that Nortel was then. At the time, I was in contact with a portfolio manager whom I met regularly to share our ideas and perspectives on the North American equity markets.
As you can imagine, at the end of the 1990s the pressure on portfolio managers was enormous to participate in the wave that was sweeping everything that came anywhere near to technology and in particular to the Internet. Companies with very traditional activities saw their stock fly by adding “.com” or “web” to their name.
But no pressure has likely matched that of the Nortel stock on Canadian managers. Imagine, carried away by the tech madness, the stock of Nortel was worth nearly 35% of the TSX 300 index (now S&P/TSX)! 35%! The Toronto Stock Exchange then attempted to remedy this anomaly by creating a variant of its flagship stock index, the so-called TSX 300 Capped, which limited Nortel’s weighting to “only” 10%.
What can a portfolio manager do in such a situation when his job depends on his ability to obtain returns that do not deviate too much from the indices to which he is compared?
It is a dead-end situation where it is almost impossible to win. If you don’t buy Nortel’s stock and it continues to appreciate, you’ll look crazy. If you buy it (almost 35% of your portfolio) and the stock corrects afterwards, you will look just as crazy, if not more. The manager with whom I spoke regularly had made a compromise decision: invest in Nortel, but in a slightly lower proportion than the Canadian index.
The situation reminds me a lot of what we are experiencing today, in particular with Tesla’s stock. Since it was added to the flagship US index, the S&P 500, a few months ago, the stock has appreciated strongly. So much so that its market capitalization now surpasses the US$1 trillion mark. Its weight in the index recently reached 2.8%. We are a long way from Nortel in the Canadian index, but the pressure on many managers and investors to buy Tesla stock is becoming irresistible.
At the time, we resisted the temptation to buy Nortel stock. I believe it is wise to do the same today for Tesla or for any security or asset class (cryptocurrency?) that promises to boost its short-term returns.
Although the decision not to touch Nortel’s stock (or the other trending tech securities) made us look bad for a few years, I was convinced then that it was the decision that a “good father” had to take. I will not let myself be tempted today by the “flavour of the day” investments.
