Commentary: Think objectively when investing

Daily Record, The (Baltimore), Mar 15, 2003 by Special to The Daily Record

During the majority of my adult working life I have often been criticized for possessing a negative attitude. Whether the accusations came from superiors or peers some individuals felt I just wasn't with their program, and therefore I had a negative attitude.

As a consequence, I was fired from my first career job and encouraged to leave my second place of employment because of my so- called negative attitude. Fortunately for me, my third and current employer must appreciate independent objective thinking because I have been with them since 1981.

Just as they say there is a fine line between love and hate, I personally believe there is an even finer line between being negative or objective. And although the boundary might be fine, there is a tremendous difference in outcomes between the two.

An attitude whether it is positive or negative is a state of mind or feeling. Whereas, objective thinking is uninfluenced by emotion or personal prejudice. I believe individuals that cannot rationally defend their courses of action accuse non followers as having negative attitudes.

Is there a place for positive attitudes? Absolutely, but like anything else in life there is a proper time and place for everything. Take sports as an example. When sporting event opponents are of equal ability, the one with the positive attitude will probably win the game.

Yet when abilities are not in the same class, all the positive attitudes in the world aren't going to help the underdog. That's why horse trainers don't race $5,000 claiming horses against $50,000 horses. It has nothing to do with negative attitudes. It is just rationalization that says the horse can't win in a $50,000 claiming race.

Now what do negative attitudes and objectivity have to do with investing? In one word ... everything! The individual retail investor generally allows emotion to ruin their investment results. They tend to base investment decisions on fear and greed which are two of the greatest enemies to successful investing.

Fear and greed are emotional states of minds. Greed generally comes into play when investors hold on to stocks too long. We just witnessed this phenomenon during the late nineties as investors thought the sky was the limit for the dot-com evaluations.

Those that held have seen their Internet stocks drop 80 percent to 90 percent in value. Some have even gone belly up. There is an old investment adage that we should all keep in the forefront of our minds: "Pigs get fat and hogs get slaughtered."

Fear enters the picture when investors are worried about missing out on a potential rise or drop in the market. Currently, you can read articles where the authors state the investor is staying in the market for fear of missing out on the start of the next big bull market. Not a good reason to stay. This market could stay in a bearish mode for several more years just as Japan's market has suffered for years since its bull market collapse.

So when it comes to investing your hard earned dollars, invest with objectivity and not emotion. The next time your financial advisor calls with exorbitant enthusiasm and tries to sell you the sizzle and not the steak, objectively inquire about the steak. Brokers are taught to present three or four bullet points about an investment to their prospects.

These points tend to focus on emotion, the sizzle, and not on the objective, the steak. If the advisor claims a company's earnings are growing at 75 percent, inquire about the bottom line. In other words, are net operating earnings keeping pace with the revenue increases? Anyone can sell tomatoes for 20 cents a pound and grow sales, but if there aren't sufficient margins there will be no earnings. The value of a stock is generally based on earnings and not revenues.

Try to not get married to a stock that you own. This is a stock that becomes your spouse. You won't listen to anyone who tries to enlighten you about the particular company. You don't want to listen to any objective thinking if it isn't positive news.

After all, you feel the messenger just has a negative attitude. In your mind the critics really do not know what they are talking about. These are the stocks you ride all the way to the top and all the way down just because you had a positive attitude. If you can refrain from tunnel vision and maintain an open mind you are less likely to watch your profits dwindle away.

Objectively speaking we have a pending war with Iraq on the horizon. We have an economy that is treading water even with the Fed rate at 1.25 percent. Unemployment is rising and consumer confidence is dropping.

We are beginning to see an increase in inflation at the producer level even discounting for the rising cost of oil. Finally, we as Americans are saving more which hurts consumer consumption which is the greatest driver of our economy. Therefore, I don't see the U.S. stock market forging ahead anytime soon. So I ask you, do I have a negative attitude on the economy or am I just being objective?

P.S. I have been writing this column for about six months now. I am interested in your comments whether they be good, bad or indifferent. I'd also like to hear any suggestions you have for improvement.