Becoming Emotionally Attached to a Stock Could Wind Up Costing You a Bundle
By Anthony Rhodes
There is a particular company out of Redmond, Washington that I happen to be quite fond of. Their software products were not only instrumental in aiding me during the formation and development of my business, but the scope and range of their goods continue to allow me to perform a great number of tasks, which I would otherwise have to outsource and pay a hefty premium for, as well. So, naturally when I hear their company slogan, there is a sense of resonance that I have which transcends my usual affiliations with other brands. Yet, as I perform my normal duties of evaluating stocks to see which ones merit my clients’ investment dollars, these circumstances do not ever become a part of the equation. The corporation’s financials are scrutinized just as diligently as any others are, and the events, which encompass my appreciation for the company, are immediately forgotten and stored away for later reflection.
Such non-biased thinking is the difference between winning and losing in the stock market, and is in fact our topic of discussion for this week. Amazingly, some investors have a tendency to purchase or hold on to certain stocks for reasons unrelated to their intrinsic value! And although this action may be overcome by individuals with deep pockets, for working class folks, a mistake of this magnitude could have disastrous consequences.
I can still recall the cries of former Enron employees during the aftermath of the behemoth energy giants’ befalling. The corporation’s perceived generous, and now infamous employer matching stock ownership plan, was supposed to provide them with an unquestioned opportunity to take advantage of its seemingly unstoppable growth potential. But in reality, it became yet another example of just what can happen when you blindly place your faith in any one company…even one that you work for. Investors ought to keep this story in mind, and remain steadfastly cautious when participating in employee stock ownership plans. While employers may tempt you with various incentives to add ever-increasing amounts of company stock to your portfolio, remember that diversification is the key to long-term investment success. I’m not implying that there’s anything wrong with showing loyalty to the company in which you work for by participating in these plans, but as with anything else, moderation remains the rule of the day.
Chasing The Wave
I’ve never quite understood the mentality of individuals who purchase a stock because of the so-called “in” factor. These companies remarkably represent a certain cache amongst investors, and for some odd reason, they rapidly become a ‘must have’ fixture in a great number of investment portfolios. Now, of course the names change periodically depending on their fashionable status at the time, but the attractiveness of these stocks is due in large part to successful media outlets touting the champion of the newest technological advancement. Their supposed, prophetic heralding of the next blue chip stock, prompts short sighted investors to grab up as many shares of these companies as they can get their hands on. But, of course this activity is precisely the antithesis of what a successful investor ought to do! The vast majority of these stocks may start out fast and furious, but once they’re confronted with the prospect of actually producing earnings, wind up revealing their true colors, and are soon relegated to the stockpile of also-rans shortly thereafter. In the stock market, just as in life, there are no short cuts to long-term success. And I would remind you of an age old warning that is appropriately worth mentioning: The candle which burns twice as bright, burns half as long.
Easily, the most difficult of these situations involve the handling of a stock inherited due to the passing of a loved one. That’s because these companies may represent our last real connection to the individual, and somehow holding on to “their” stock seems like the right thing to do, regardless of what it’s actually worth monetarily. Even more troubling in this dilemma, is when the stocks being inherited, represent the companies in which the individual worked for during their lifetime. After so many years of commitment, would it be right to sell these stocks when they begin to lose value? To address this situation appropriately, ask yourself why the individual got into the stock market in the first place. Was it to own companies just for the sake of doing so, or was it to make money? Equally as important is your arrival to the conclusion that you are now the rightful owner of those investments, and as such, must now make decisions based on that realization. Perhaps the individual left the securities under your stewardship because he or she remained confident that the portfolio would prosper under your management. Assuming this to be the case, do you honor their decision by holding on to an underperforming stock?
Human beings are emotional creatures, and as such, are prone to make emotional decisions. And while there are situations where this fact can prove beneficial and even rewarding, the particulars, which govern the handling of our investments, are not amongst them. You would be hard pressed to find a greater manifestation of this truth than the stock market. In this environment, success is often determined by how swiftly one can process information, and convert it into deciding whether or not to buy or sell a particular stock. With these rules being so clearly defined, emotional involvement is a luxury which one can ill afford.
(Anthony Rhodes is a Registered Investment Advisor and owner of wealth management firm The Planning Perspective www.theplanningperspective.com )