Investors who bought shares in Twitter (NYSE:TWTR) at $51.70 earlier this year are currently down 33% on their investment. And the news looks like it’s getting worse as Elon Musk has announced that he won’t be taking the company private, causing Twitter stock to fall further.
According to Warren Buffett, the first rule of investing is to avoid losing money. And the second rule is to remember the first rule. I don’t own Twitter shares and never have. But I think that there’s an important lesson for investors like me to learn from the Twitter stock saga.
A takeover bid is not an investment thesis
The lesson to learn from watching the Twitter share price over the last few months is that buying a company’s stock needs to be the result of a positive view of the underlying business. By itself, the prospect of a takeover bid is not a viable investment thesis.
That’s because there’s always the possibility that an attempt to take a company private will fail. And if my only reason for buying the stock is the expectation that someone else will buy it off me for a higher price later, then the attempt falling through destroys my entire investment thesis. As an investor, this is something that I need to consider.
The way for me to do that is to ask myself whether I’m happy owning the shares if the buyout attempt doesn’t go through. If the answer is ‘no’, then I probably don’t have a positive enough view of the underlying business to justify buying the stock.
Warren Buffett
As is often the case, Warren Buffett is a great example of someone to follow here. Buffett owns Activision Blizzard stock, which is the subject of an acquisition bid from Microsoft.
The acquisition, bid, however, is not why Buffett bought Activision shares in the first place. Instead, Buffett has been investing in Activision because he has a positive view of the underlying company’s prospects going forward.
Evidence of this comes from the fact that Berkshire Hathaway started buying Activision stock before Microsoft made its approach. In other words, the idea that the company might be bought out for more than its current share price was not part of the initial investment thesis.
This means that Buffett’s risk is limited. If Microsoft’s attempt to buy Activision fails – for whatever reason – then Berkshire will own shares in a business that Buffett feels positively about.
Twitter stock: lesson learned
The Twitter stock saga might or might not have ended. Maybe the deal gets resurrected one more time, maybe someone else comes in to buy the business, or maybe Twitter remains a publicly traded company.
Whatever happens, the lesson from the story for for me as an investor is clear enough. Buying a stock in order to sell it at a higher price in a takeover is risky.Â
Investing is about buying shares in companies based on their long-term business prospects. The possibility of a buyout might be attractive, but it can’t be the main part of my investment thesis.