Investors buying into stocks are, in some ways, buying into the company's story, expressing an optimism that the company can stay on plan and generate growth and earnings for years to come. It pays to be an optimist, but as the recent GameStop (NYSE:GME) rally and subsequent fall demonstrated, blind optimism can get you in trouble as well. 

During this appearance on Motley Fool Live recorded on Feb. 11, Motley Fool Co-Chairman and Chief Rule Breaker David Gardner, and Industry Focus host Nick Sciple discuss the importance of being both optimistic, but also realistic, when analyzing stocks.

 

Nick Sciple: David, this isn't a question I planned, but your answer, maybe think about it a little bit is, what's the importance of optimism for you, for investing? When you get a position up really big, it's this idea that, oh gosh, I'm going to lose these gains, they're going to go away, or you talked about are grossly overvalued by the financial media. It's the same idea that it can't get better. It's as good as it's ever going to get. How important is optimism and just belief that it's going to keep getting better to how you think about buying stocks?

David Gardner: Well I think everything is contextual, Nick, so I would say that that is true of many of my favorite things in the world. They keep rising. Let's just think about the stock market. Look at the S&P 500 over the last century, it keeps going up. What do I think is going to happen in the next century? The same thing. Why we're there lots of factors as to why the market goes up over time, but the biggest one is simply human ingenuity. We're all working hard. The majority of our country is in the private sector, not in the public sector. We're all working hard, the businesses trying to deliver a better product or service to make consumers happy, to add joy to their lives, and have them become fans of what we do and grow it. Certainly, we feel that at The Motley Fool and we're so grateful to think that we've got so many people listening to your podcast right now. That's so exciting to me that we're reaching people. A lot of stuff grows, but not everything grows. Some of the fad stocks of the last few weeks that have unbelievable moves, that's very temporary. I don't think, for example, those kinds of companies are going to keep going up forever. That's a very short-term phenomenon. I think you have to sort out what is persistent and what is sustainable from the things that aren't. But once you find the things that are persistent, and sustainable, and that are growth-oriented, and add value to the world, that's where we want to be hitching our portfolio's wagon to those stars. That's what I've tried to do my whole life long. So yeah, I am certainly an optimistic person. You don't have to be an optimist to be hired by The Motley Fool. We have a lot of realists. We probably have few pessimists too, but I think for the most part, the world is to the doers, and the doers are the ones to say, yes, I think we can, and usually, they go on to do it. I think that's a really operative condition for success in business and for the stocks that we buy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.