FOOL ON THE HILL: An Investment Opinion
Don't Dismiss Negative Sentiment

Don't like what someone is saying about your company? Accuse 'em of spreading fear, uncertainty, and doubt (FUD). It's the easy way to keep from actually having to think about threats to your investment. And you know what? If you can't see threats, they can't hurt you. That's the thought, at least. Perhaps a better way to keep ahead of the game is to retain detached skepticism and a willingness to analyze information at face value, regardless of the source.

By Bill Mann (TMF Otter)
September 1, 2000

Make no mistake about it, lots of stockholders hate fear, uncertainty, and doubt, better known by the acronym of FUD.

I especially hate this term FUD. I hate how it is used and overused, and I especially think that it gives people an excuse to avoid thinking about the risks to their investments. It is the most abused, overused excuse of an argument that I see on stock bulletin boards. Well, just after the "basher" or "short seller argument." But really, the application comes from the same place.

People don't want to think unhappy thoughts. I dig that. But unhappy thoughts are not going to destroy your portfolio. And happy thoughts are not going to take it to the Promised Land. In fact, I am fully and completely convinced that the investor who is willing to think and analyze unhappy thoughts is going to come out ahead of the one who does not 99% of the time. The other 1%? Well, either the rose-colored glasses investor is blindly lucky, or the analytical one is unfortunately incompetent.

Simply put, FUD is an intentional attempt by a competitor or some other agenda-laden source to negatively spin certain facts about a company and its products to induce uncertainty among its customers and/or its investors. In the Internet sphere, I generally come across it on stock discussion boards. And there should be no doubt that there are a significant number of people out there who have something to gain by spreading doubt or even slander about any given company, as the brazen hoax perpetrated against Emulex (Nasdaq: EMLX) and its shareholders last week illustrates.

But negative sentiment, or even negative and skeptical questions, are not all FUD. I see so many discussions that should really be happening get dismissed out of hand because those holding long positions on a stock start pulling out the FUD card.

We should all stipulate that FUD exists. There are great examples of it on a corporate level. The great Linux debates come to mind, as do the competing arguments about which standard is going to win third-generation (3G) wireless. Any company that is threatening to become a standard in an open environment gets to deal with a ton of it. Rambus (Nasdaq: RMBS), Brocade (Nasdaq: BRCD), Phone.com (Nasdaq: PHCM), Qualcomm (Nasdaq: QCOM), Broadcom (Nasdaq: BRCM), even Red Hat (Nasdaq: RHAT). Any situation in which a company stands to make life uncomfortable for the current standard-holder is rife for insinuation.

But just because something may come from a conflicted source does not mean that it should automatically be discounted. I'll give you an example: Three weeks back, The Wall Street Journal ran a story questioning the veracity of Lernout & Hauspie's (Nasdaq: LHSP) customer list in Korea, after having interviewed several of the customers that L&H's CEO had listed. Never mind that one of the authors had come from TheStreet.com (Nasdaq: TSCM). Never mind that one of TheStreet.com's big investors is also holding significant amounts of L&H shares short. The position of the questioner in no way invalidates a good question.

This is not high school debate team. You don't win by trashing the questioner. You win by taking all available information and making rational decisions. So, maybe there's something to the L&H thing, or maybe the Journal is allowing some cub reporters enough latitude to risk its journalistic integrity by going on a manhunt. But for heaven's sake, at least think about it, or think about the ramifications to your investment if the Journal reporters are on to something.

Those who wrote the original article, as well as those (including myself) who commented on the perception of a problem (one that required L&H to have an external audit conducted), were met with vitriolic accusations of shoveling FUD. I was surprised by the reaction, but perhaps I should not have been.

Here's how I see it. Fear. Fear is bad. It makes investors do stupid things. It creates a situation where we run from what should be an opportunity. Any conversation participant who is attempting to spread fear should not be trusted.

Uncertainty, though, is a positive thing. You should always retain uncertainty about your investments, no matter what they are. Why? Because certainty lends itself to overconfidence. Overconfidence lends itself to blindness, and blindness is inherently bad for making rational decisions, especially if the blindness is willful.

Doubt? Well, doubt is what you should do every time any news item about your company comes out. It's kind of like the old Arabic saying: "Trust Allah, but tie your camel."

For example, a Fool writer comes out and says that Juniper Networks (Nasdaq: JNPR) is dreadfully overvalued by certain measures. Fine, disagree. Disagree thoughtfully. But don't dismiss it as FUD. Because Juniper is overvalued by about every measure I can think of. That said, every switch technician, every telco engineer I know absolutely raves about Juniper routers, and the company is without a doubt in the sweet spot of an explosive growth market, one in which it is muscling out some much larger companies.

So certainly there is plenty of fertile ground for some entities with a lot to lose to spread some FUD on Juniper. But does that mean that every single bad thought, every nervous rumination on the company is, in fact, an attempt to discredit it? Not a chance. At a trailing P/E of 2200, the company is, well, historically grossly expensive.

Too often the stock message boards read like sports fan rags. Bouts of collective euphoria, herd mentality, even the ugly witch hunt or two. This, as much as anything, is human nature. But successful stock investing has little to do with human nature. It has to do with dispassionate analysis of facts and the superior application of those facts in buying and selling equities. In doing so we are all guilty from time to time of underweighting certain pieces of information and overweighting others. In fact, our minds conspire against us to make it so, even if it is to our detriment.

But the next time you come across points that paint a company you hold in a negative light, resist the temptation to dismiss the argument as FUD, because one of these days a piece of information counter to your interest is going to turn out to be true, and you get no credit for having known and ignored it.

Fool on!
Bill Mann, TMF Otter on the Fool Discussion Boards