There's an old saying that there's no price too high for a bull, no price too low for a bear.

This may be true, if the bull and bear happen to be idiots. Because every company has a price at which it's overvalued, and every company, except for those on the path to bankruptcy, has a price at which it's a bargain.

The mind's eye and the markets
The human mind is an incredible instrument. Its capacity for self-preservation is only beginning to be understood. In some ways, this is extremely good. The mind's ability to deceive itself is a key component in the occasional need for people to undertake extremely dangerous tasks. It also has long been one of the linchpins of all sorts of markets -- how perceived value can differ wildly from participant to participant.

This is a natural in the case of markets for goods, of course. If you are stranded in the desert and have 1,000 diamonds but not a drop of water to drink, the amount you determine for just one of those diamonds is actually quite low in exchange for some water. The marginal utility of a unit of water would be much higher. In the stock market, though, where there isn't a whole lot of utility to the participants of the goods trading (unless you like to use penny stock certificates as wallpaper), everyone is looking at companies through the same basic lens: "What is this company going to be worth later?"

And the differing opinions are what make a market. But it's important to note that although each opinion has some bearing on the share price of companies, some have a great deal more validity than others. And when your opinion and your cash are built upon an invalid premise, you're setting yourself up for trouble. Many times, these premises are built upon that delusion -- the mind's ability to deceive us into seeing things as we want them to be.

Sports fans can understand this concept. How many times have controversial plays decided a game? It's no coincidence that fans of one team see a play one way, while fans of the other watch the exact same play, yet see something entirely different. It's not because they have a different sets of eyes, or they come from a different species. It's that they see what they want to see.

This isn't just the realm of the weak-minded. George Bernard Shaw once said, "The power of accurate observation is commonly called cynicism by those who have not got it." But he himself had his own blind spot. Having spent substantial amounts of time in the Soviet Union, the terminally socialist Shaw was simply unable to see the horror of the reign of Josef Stalin. He called some of the arrests without trial and mass executions during the 1930s "excesses." Even those well aware of the mind's ability to deceive aren't always able to resist.

It's gonna cost you
In investing, the problem, of course, is that your mind's ability to deceive itself can cost you a great deal of money. In 1999, I wrote an article suggesting that we "might be" in the midst of a bubble, citing as examples several large companies, including CMGI (NASDAQ:CMGI), nearly doubling in value in little more than a month's time. This seemingly benign statement earned me a rash of hateful emails containing a fine collection of the great bromides of the time. "They're the arms merchants of the Internet," "They've got brilliant management," or "It's all about collecting eyeballs," and so on, down to the more personal, "You're just jealous" or "stupid." What I didn't receive was a single note back expressing concern about the potential for this company to be overvalued. It just was, and shareholders wanted to believe it. And it cost 'em billions. CMGI is down 99.95% since that point. The price shareholders paid for seeing things as they wanted them to be? Too high.

It's not as if this sort of mentality disappeared during the collapse of the bubble, either. How many times have people -- smart, analytic folks -- found companies that they thought were really cheap, only to deceive themselves when the company and its business were teetering on the verge of collapse? They call these companies "value traps." Qwest (NYSE:Q) is one. So was Enron. Well, it was, briefly. But people spent so much time focusing on what would happen with new management that they ignored the fact that the company might not survive the existing one. Boom.

Those are extreme cases. But for a long time Advanced Micro Devices' (NYSE:AMD) shareholder base has ranged from the "enthusiastic" to the "fanatical." An AMD mention that is insufficiently glowing nearly guarantees that the author will be shredded on sites and message boards devoted to AMD investing. Heck, even no mentions of AMD have been known to do the trick. The buzz on AMD has always been that its technology in certain markets is superior to Intel's (NASDAQ:INTC), the dominant player in semiconductors, and that market uptake of such would propel their investments skyward. Instead, AMD today trades at half of what it did in 1998, and its managers have made a near cottage industry out of lifting the hopes of its investors, only to fail to meet expectations.

In search of rationality
I say none of this to impugn AMD investors -- anyone who has spent a minute churning through an AMD message board will know that these folks know what they're talking about. In fact, for me, the prize for delusion goes to the investors in a certain "smart window" company that has gone on for more than 30 years without generating any commercial sales.

In any investing scenario, the successful investor must be able to see things as they are, and then determine reasonable prospects for success. Ignoring or explaining away a company's increasing debt doesn't do you a whole lot of good. There are great reasons for companies to take on debt, but it isn't prudent just to assume this is the case. Buying into the thought that the teen retailer market is a $200 billion industry is a disservice to an investor who takes no time to think about how much of that market a company has a reasonable chance of capturing.

And no, the CFO didn't really suddenly resign "to spend more time with his family." Your ability to interpret sudden actions like this may help you avoid a disaster.

You're never going to have perfect information. It doesn't exist. But your ability to observe accurately the facts you do have, and to adjust your assumptions, are key elements in successfully managing a portfolio of common stocks. Having this ability doesn't guarantee you success, but lacking it almost certainly guarantees underperformance, or loss.

Fool on!
Bill Mann, TMFOtter on the Fool Discussion Boards

Bill Mann's most recent articles can be accessed from the "Browse Stories By Author" box on the main page. Bill owns none of the companies mentioned in this article. He is senior editor of The Motley Fool Select, where you can find his best Foolish stock ideas that you won't find anywhere else. The Fool is investorswriting for investors.