This Motley Fool series examines things that just aren't right in the world of finance and investing. Here's what's got us riled up this week. If something's bugging you, too -- and we suspect it is -- go ahead and unload in the comments section below.
Today's subject: In these contentious times, too many people cling fiercely to ideas or opinions they've fallen in love with, even when the facts defy them. In investing, this irrational preference for rage over reason manifests itself as a disorder I've dubbed Sirius Syndrome. This malady's not only unpleasant to live with, but can also wreck your portfolio.
Why you should be indignant: The stock market can be highly irrational in the short term, and sufferers of Sirius Syndrome only make it worse. These cultish folks go into attack mode if anybody brings up a bearish premise that dares to contradict the assumptions they hold about their favorite stock, or requires them to expend a few of those wonderful things we call "brain cells" to calmly assess.
Why "Sirius Syndrome"? For years now, the mere whiff of a negative observation about Sirius XM (Nasdaq: SIRI ) has often drawn an inferno of fiery comments from Sirius fans. Past factual data about Sirius XM's high debt load, its competitive landscape, and its long, very real history of annual losses should never be overlooked in an investment thesis, much less met with enraged insults.
To be fair, this mentality doesn't end with Sirius. Back in 2005, I noted that any negative sentiment about Apple (Nasdaq: AAPL ) spurred the wrath of the cultists (who slung insults like "You're fat and sad"). At one point, my doubts regarding Talbots' (NYSE: TLB ) turnaround chances led a supporter to accuse me of holding a petty grudge because I couldn't get my allegedly substantial posterior into the retailers' pants. While that admittedly creative theory gives a whole new meaning to the term "rebuttal," it's not an intellectually valid argument.
In 2007, when I pointed out burgeoning inventories at Crocs (Nasdaq: CROX ) , and questioned whether Crocs might be a fad, I got called all kinds of names and branded with myriad accusations, including that tired old conspiracy theory, "You're just short." Crocs ended up tanking from about $75 per share to penny-stock territory once its problems became horribly clear.
What now: If you're insulting reasonable people who disagree with your premise, both your portfolio and your ego are likely cruising for a bruising. Hubris and overconfidence can ruin an investor. Sure, I was happy to see that my pick for Best Stock for 2009, Starbucks (Nasdaq: SBUX ) , was the second best performer after Amazon.com (Nasdaq: AMZN ) when we revisited the series' returns in December. But that performance might owe more to the 2009 market rally than any particular genius on my part. And judging by my current CAPS score, I am definitely not always right. (Who is?)
Embracing a diversity of opinions, rather than marching in intellectual lockstep along a single narrow course, helps investors create a more robust market. Michael Mauboussin, author and chief investment officer for Legg Mason, has argued that when markets lose this cognitive diversity, they're more likely prone to sink into excess -- and create opportunities for savvy contrarians. Wouldn't we all rather be on the profitable side of that divide?
Mauboussin has also championed the importance of diverse thinking in generating excess returns. He cites empirical evidence from psychologist Phil Tetlock's study in the book Expert Political Judgment, in which predictions made by 300 experts over a 15-year timeframe showed a disappointing tendency to fall flat. However, trends within that data revealed that people with more diverse thoughts and opinions made better predictors.
If you're thinking just like the crowd -- and unable to process or accept differing points of view -- you risk making grave and significant misjudgments about your stocks. Add emotion to the mix, and, well, look out below!
I'm not saying everybody should always agree with me, or with anybody else. We should celebrate differences of opinion, use critical thinking to assess the data at hand, and then make up our own minds (or maybe even change them). And in all fairness, people who invested in Sirius, Talbots, and Crocs at their lows, despite others' bearishness, have enjoyed price appreciation. If you're right, the long haul will prove it.
Shame on investors whose cultish zeal leads them to outright reject rational arguments -- and to insult, threaten, or otherwise hate on anyone who disagrees with them. Personal insults and fabricated theories just aren't polite. More importantly, they can cause big trouble for your portfolio when all is said and done.