In Homer's The Odyssey, Odysseus plugged his crew's ears with wax to tune out the Sirens' song. He left his own ears unplugged, but he lashed himself to the mast to avoid making any regrettable decisions.
These days, though, it seems that many individual investors use the opposite tactic. Judging by the hatemail deluge that can follow bearish comments about some investors' darling stocks from past and present -- a few examples being Apple (Nasdaq: AAPL ) , Sirius XM (Nasdaq: SIRI ) , Jones Soda (Nasdaq: JSDA ) , lululemon (Nasdaq: LULU ) , Google (Nasdaq: GOOG ) , and Netflix (Nasdaq: NFLX ) -- I can easily deduce that many people fail to keep an open mind to the bear, or contrarian, arguments about their favorite stocks.
That's a big mistake.
You're just short!
This mentality isn't new. That's made clear in Thornton O'glove's Quality of Earnings, which was published in the 1980s -- before the Internet made so much information easily available to investors.
Even beyond frequent conflicts of interest often found on Wall Street, O'glove notes investors' tendencies to be overly optimistic and dismissive of -- or, worse, infuriated by -- bearish takes on their favorite stocks.
Today's retail investors aren't the only guilty ones -- Wall Street hasn't been exempt over the years. O'glove tells a story about one lonely analyst who sounded an alarm on Mattel way back in the day:
[Daniel] Meade recalled a time when the entire investment fraternity was bullish on Mattel, and he put out a sell recommendation. "Everyone dumped on me. They accused me of being short the stock and characterized my analysis as perverted."
The stock declined from $38 to $2, which certainly proved Meade's bearish premise at the time.
O'glove also writes about the tendency of newsletter writers to capitalize on this desire for upbeat news and the promise of eye-popping growth:
Letter writers know that their readers are always looking for inside information on special situations, those undiscovered growth stocks which will double overnight. They don't want to hear about an overblown issue that should be avoided or shorted. If they don't own it, they won't buy, and if they do, they have an emotional commitment and probably won't sell.
He also points out another thing to bear in mind -- as much as many find "shorts" distasteful (and the anti-short-seller din has become deafening as the financial crisis has unfolded), they're part of an efficient market. O'glove argues that without short interest, stock prices would only reflect optimism and not all the information at the crowd's disposal. It may be a bit uncomfortable to us, but it's not illogical, either, and I believe it's more important than ever to bear this point in mind.
Read, discuss, invest
Of course, I'm not glossing over the fact that The Motley Fool offers newsletter services. However, nobody in Fooldom gets shut down for an opinion, whether or not it agrees with the crowd. (As long as you're not cussin', of course.)
In our Motley Fool Stock Advisor service, for instance, we feature a monthly "Dueling Fools" feature, in which co-advisors David and Tom Gardner take turns as bears and bulls. Subscribers go much further than happy talk, as well -- this is a service, including committed communities and a focus on investor education and tools.
It's everybody's responsibility to weigh the investment theses and formulate opinions, judgments, and buy decisions. The more opinions, the better.
We can agree to disagree ...
While I appreciated the overall message of O'glove's book, I didn't agree with everything he wrote. I disagree with his contention that individual investors aren't really part-owners of companies. Also, I disagree with his view that a dividend often means that a company's a no-growth stinker with few prospects (or is unable to determine the prospects it does have). Some surprisingly growth-oriented companies, such as American Eagle Outfitters (NYSE: AEO ) , return cash to shareholders through dividends, so it's the kind of idea one should weigh carefully.
Nevertheless, I'd recommend the book to anyone who wants to develop a more critical investing eye. And that's more crucial now than ever before: When the book was written, individual investors like us had very little choice but to rely on Wall Street analysts. With the Internet, we now have unprecedented access to information and opinions, in a time when it's clear that the crowd can help us all make more informed decisions and be better investors. So listen up -- it's a great time to be an investor.
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This article was first published Sept. 15, 2007. It has been updated.
Alyce Lomax does not own shares of any of the companies mentioned. The Fool owns shares of American Eagle Outfitters. Netflix, American Eagle Outfitters, and Apple are Motley Fool Stock Advisor recommendations. Jones Soda and Google are Motley Fool Rule Breakers picks. The Fool has a disclosure policy that never says, "La-la-la, I can't hear you!"