Don't get emotional about stocks!
Don't get emotional about stocks!

Why Do Investors Get Emotional About Stocks?

In the 1987 classic movie Wall Street, the iconic character Gordon Gekko advised Bud Fox, “Don’t get emotional about stock. It clouds the judgment.” Of course, the table was turned later in the movie and it was Gekko that was getting emotional over the roller coaster ride Blue Star Airlines was on.

I am bringing this subject up due to something I have witnessed more and more recently. In addition to writing for Bull Market Rodeo, I also write articles on Seeking Alpha. I usually write earnings previews for different companies and the articles can take a bullish, bearish, or neutral tone. It all depends on what the information tells me.

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When I evaluate the subject company, the main themes I take into account are the fundamentals, the technical picture, and the sentiment toward the stock. For a bullish opinion, I am looking for strong fundamentals with growing earnings and sales. I want to see a clear long-term upward trend on the chart and ideally the sentiment toward the stock is somewhat negative.

I view the sentiment in a contrarian manner, but it has to be used with the fundamentals and the technical analysis. If a stock has really strong fundamentals and the stock has been screaming higher, you would expect the sentiment to be pretty bullish. Being contrarian in such a case would typically not be very wise. However, if the company has strong fundamentals, is trending higher, but has negative or neutral sentiment toward the stock, that is a scenario that usually supports the upward trend continuing.

Conversely, a stock that is trending lower and has poor fundamentals should have some pretty bearish sentiment toward it. Buying a stock that is in a downward trend and is seeing declines in sales and earnings is a good way to lose money. But if you can find a stock that has been trending lower, has poor fundamentals, and the sentiment is bullish—that is a good sign that the downward trend is likely to continue.

Reader Reactions Usually Confirm My Opinion

I wanted to share my process with you so that you get an idea of the steps I go to before writing about a company. I approach it in a very methodical manner and I never write about a stock that I own. If you own a stock, you already have a bullish bias toward the stock, or at least you better, otherwise why do you own it?

One of the things I am noticing more and more lately is how many angry comments I get from readers when I write a bearish piece on a popular stock. I wrote an article about Halliburton last week, and I pointed out how the earnings and sales have been flat in recent years, and I pointed out that the stock has been trending lower. Most importantly, the sentiment toward the stock is extremely bullish.

There are 38 analysts following Halliburton and 34 of them have the stock rated as a “buy.” The stock is down over 50% from its peak in July 2014, its earnings and sales haven’t grown during an economic expansion—and 34 out of 38 analysts rank the stock as a buy! I don’t get it.

In addition to the bullish sentiment from the analysts, the short interest ratio is well below average. As of December 31, the ratio was at 1.39. I have used the short interest ratio as a sentiment tool for almost 20 years now and I would say the average short interest ratio ranges between 2.5 and 3.5. I consider readings below 1.5 as extreme bullish sentiment and readings over 5.0 as extreme bearish readings. If Halliburton had been trending higher and had incredible fundamentals, I could accept such a low short interest ratio. But that isn’t the case.

Of course, after the article was published, I started receiving the usual comments on the article. I even had one reader question whether I knew what line of business the company was in.

Halliburton isn’t the only example either. I wrote a cautious piece about Netflix last week and received nasty comments about my evaluation. I wasn’t even bearish on the stock, I just felt like investors needed to be cautious after the big run up from the end of December and with the sentiment shifting to a more bullish stance.

I wrote a bearish piece on IBM back in October, and a reader suggested that I go back to teaching. Apparently, he read my bio and learned that I started out as an education major, but he failed to realize that I have never been a teacher. Instead of reading my article with an open mind, he decided to try to insult me. Based on his comment I’m quite certain he held on to his shares of IBM, and the stock is down 13.7% since my article was published. It was down 25% at the low in December.

Going back to the title of this article, why do investors get emotional about stocks? Why would you read an objective opinion about a stock you own and then try to bash the author? Why not read the article, determine whether the arguments have merit and then file the information away?

I don’t want to make it sound like I am always right about stocks and I don’t always write bearish articles. But each time I write about a stock, I do my research from a completely neutral point of view. I gather the information and then determine whether I should be bullish, bearish or neutral.

One thing I am learning though, the nastier the comments and the greater number of comments I get that suggest I don’t know what I am talking about—that is usually a good sign that my prognosis is accurate. It’s almost like another sentiment indicator. The more emotionally involved investors are, the greater the chances are that the stock moves lower.

My suggestion to investors is to take Gordon Gekko’s advice and leave emotions out of your investment decisions. I have stated for years that I try to approach investing like a mercenary—I don’t pick a side that I want to win and then go that way, I decide which way I think is going to pay me more money and then take that side. If it looks like the stock is going to go up, I will go with that side. If it looks like the stock is going to go down, I go with that side. If I am not invested in the stock, I really don’t care which way the stock goes.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

2 comments

  1. Halliburton is a leading oil and gas service company. However with low oil prices I am sure revenuebis low.. Sclumberger has fallen from its highs as well.
    I do see I is up today but not sure how much it has gained from it’s losses.
    I enjoy reading your articles! Thank you!
    Lenny

  2. You just wanna make money on investments no matter how you do it? How dare you! /s. Well, so do I. I need to read more of your Seeking Alpha columns on good companies that are going to go up.

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