I recently broke two of my own investing rules. I invested in the recent IPO of a company, in spite of (still) firmly believing that IPO stands for Imaginary Profits Only like Benjamin Graham famously referred to them. The other rule I broke is equally if not more egregious, that of investing in possibly the worst sector there is; the airline industry. Yes, I invested in the Indigo Airlines IPO that listed on October 27th 2015.
It was tempting to do a post titled similar to this one, something called “5 reasons why Indigo Airlines is a fabulous stock pick” or why “IPOs of certain companies are awesome even if they are airlines“. Given the stock of Interglobe Aviation (the company that owns Indigo Airlines) has gone from the listing price of 765 to 1041 (as of 11 Dec), gain of 35% in a little over a month.
The one month gain is immaterial. My decision had nothing to do with having brilliantly gauged a competitive advantage in the Indigo business model (standard fleet type, favourable lease terms, low maintenance costs, quick on-ground turnaround times) – all reasons made popular in the Harvard Business Case on Southwest Airlines more than a decade ago.
I applied for the Indigo IPO to challenge something I’ve held as tenets of investing for a while; no IPOs and no Airlines. In other words, to try to break out of confirmation bias by performing an experiment.
Confirmation Bias – when we form an opinion, and then we systematically look for evidence to support that opinion while discarding anything that contradicts it
Consider this excerpt from “Decisive: How to make better choices in life and work” by Chip and Dan Heath
Smokers in the 1960s, back when the medical research on the harms of smoking was less clear, were more likely to express interest in reading an article with the headline “Smoking Does Not Lead to Lung Cancer” than one with the headline “Smoking Leads to Lung Cancer.” (To see how this could lead to bad decisions, imagine your boss staring at two research studies headlined “Data That Supports What You Think” and “Data That Contradicts What You Think.” Guess which one gets cited at the staff meeting.)
To really give this a shot, I had to approach it with an open mind, to find a potential investment that challenged those tenets, and to actually put money into it. Now, instead of seeking out information that confirms that IPOs and airlines are bad investments in general, I have an on-going experiment that could make me rethink the level of certainty in those two assertions. Results awaited in the next 12 – 18 months…
In the meantime, suggest reading this short article: Challenge what you think you know