Why haven't you bought IOOF?

If the headlines are putting you off a stock like IOOF, the first thing to examine is your psychological response to bad news and uncertainty.

Intelligent Investor has had a Buy recommendation on platform and financial advice provider IOOF Holdings (ASX: IFL) for a few months now. It's well managed, and the acquisition of ANZ's wealth management division should be very positive.

IOOF has a long history of making sensible acquisitions, slashing costs, and combining systems. Managing director Chris Kelaher is, if I might use a well-worn phrase, one of the best in the business.

Since our April upgrade, however, the government has launched a Royal Commission into the financial services sector. All sorts of unsavoury industry practices - many of which aren't overly surprising - are getting an airing in the media.

Most worryingly for IOOF, Chris Kelaher also appeared before the Royal Commission and treated it with disdain. It's debatable whether the company has done anything wrong but, leaving that aside, Kelaher's dismissive answers to counsel's questions showed poor judgement. The media went into a frenzy, and IOOF's share price has fallen as a result.

So that's the background, but let me ask you a question. How have you responded to this media storm? Has it put you off IOOF as a potential buy?

The most important thing

I ask because I firmly believe that adopting the right psychological mindset is vital to investment success. In fact, I believe it's the most important thing to get right; much more important than being a numbers whizz, for example.

You should be attracted to stocks that are out-of-favour, or where there are very negative headlines. If need be, force yourself to look at stocks with bad news.

Inoculating yourself against bad news isn't easy, but it's progress if you can grit your teeth and buy anyway. My most memorable personal example was buying Macquarie Group (ASX: MQG) the day after Lehmann Brothers collapsed (before the global financial crisis took hold) in September 2008. Believe me, it was very difficult and I really had to push myself to hit that 'buy' button.

While IOOF's situation now and Macquarie's in 2008 are very different - for one thing, IOOF is not at risk of collapse - there are various similarities.

First, recognise there's no certainty during these periods. Macquarie - like many global investment banks - might have collapsed after I bought it (indeed, I think I underestimated the probability at the time). IOOF might be subject to regulatory action, the Royal Commission might recommend integrated financial services companies be broken up, or Chris Kelaher might be forced to resign.

Secret source

Second, there's only so much reassurance we can provide on Buy recommendations during periods of uncertainty. We can't be too upbeat because risk accompanies all recommendations and we have to explain the reasons for market concern. Recognise that the uncertainty is the source of the buying opportunity.

Third, member comments won't provide much reassurance either. Back in 2008 the Intelligent Investor site wasn't set up for member comments. Today we encourage them but comments from worried members can tend to reflect negative media headlines. A bear case can always be made, so you should also expect some members to disagree with Buy recommendations.

Fourth, recognise that bad situations can get worse. Macquarie's share price fell 40% in the five months after September 2008 and didn't convincingly exceed my purchase price for three years afterwards. It's possible IOOF's purchase of ANZ's wealth management arm will end up being its first dud acquisition.

None of this is to convince you to buy IOOF in particular. As you know, we're unable to provide personal advice, and you need be able to sleep at night. The aim is simply to provide a current example of an out-of-favour stock you should at least be considering.

Accept, or reject?

It's perfectly fine, of course, to do your research and then reject the idea. Perhaps you'll conclude we're underestimating the risk of break-up, perhaps fee margin erosion will accelerate, or perhaps upstarts - and market darlings - like Netwealth (ASX: NWL) and HUB24 (ASX: HUB) will take market share over time. All these are potential risks.

Just make sure your rejection is based on sound analysis of the company and industry, as well as independent thinking. I find it helps to imagine what the company might look like in five years, as well as what the headlines might be (IOOF bids for AMP, perhaps?).

Your psychology is your own worst enemy in investing. We often think that when a cheap stock comes along it will be easy to recognise - and to buy.

That's rarely the case. The next time a stock plunges or is in the headlines for all the wrong reasons, take a step back and critically examine all available information. Five years from now the performance of the business will be what has delivered returns, not what was in the headlines for a month or two in 2018.

Note: The Intelligent Investor Equity Growth and Equity Income portfolios own shares in IOOF. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.

Disclosure: The author owns shares in IOOF and Macquarie Group. He has considered buying more IOOF but, having taken up stock in last year's entitlement issue, is at his maximum portfolio weighting for the sector.

Disclaimer
Intelligent Investor provides general financial advice as an authorised representative under the AFSL held by InvestSMART Publishing Pty Limited (Licensee). InvestSMART Funds Management Limited (RE) is the responsible entity of various managed investment schemes and funds and is a related party of the Licensee. The RE may own, buy or sell the shares suggested in this article simultaneous with, or following the release of this article. Any such transaction could affect the price of the share.

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