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Apple: Right Stock Wrong Emotions

This article is more than 10 years old.

Image via CrunchBase

Remember last week, when Apple (NASDAQ:AAPL) stock dropped from low $520s to low $490s, and investors headed for the hills? Now Apple is back to $520s, investors are coming off the hills, racing for the valleys. What has changed in one week?

Not much. Apple's economic fundamentals were at least as solid last week as they are this week. What can then explain this big change in investor sentiment?

Emotions.

As I discussed in my book The Economic Foundations of Intelligent Investing, humans are both intelligent and emotional beings. As intelligent beings, humans decide by reason, by carefully examining the parameters of the environment they live in, setting goals and priorities and crafting alternative strategies and tactics to reach them. As emotional beings, humans decide by impulse rather than reason, fueled by anxiety, anger, fear, greed, complacency, etc., ignoring the environment they live in, failing to set goals and priorities, craft strategies and tactics.

The intelligent and the emotional side of human beings come out in investing. Intelligent investors make decisions by carefully examining their financial priorities and constrains, and the "economic fundamentals," the macroeconomic and microeconomic environment that surrounds financial markets. Younger intelligent investors, for instance, invest more funds into high-risk assets, such as equities and commodities, while older investors invest more funds into low risk or no risk assets, such as government and corporate debt and bank deposits. In a declining economy, intelligent investors allocate most of their funds into government debt and non-cyclical equities, examining carefully the economic and financial conditions of each corporation they consider including in their portfolio.

Emotional investors, by contrast, decide by impulse and hype fueled by irrational exuberance and irrational pessimism, rather than reason. They rush and race to buy or sell stocks, simply by listening to "experts," stockbrokers, financial analysts, and portfolio managers who come up with one story or another to support an everlasting trend.

Irrational exuberance and irrational pessimism is more pronounced in momentum investing whereby investors chase after popular stocks-networking in the late 1990s like JDS Uniphase (NASDAQ:JDSU), Ciena (NASDAQ:CIEN), Cisco Systems (NASDAQ:CSCO), and Lucent-Alcatel (NYSE:ALU) that now trade at a fraction of their 2001 highs; and web-based companies like Open Table (NASDAQ:OPEN), and Groupon (GRPN), and Netflix (NASDAQ:NFLX) right now.

The bottom line: Investors should learn to follow the economic fundamentals of the companies they invest, not their emotions, because it is economic fundamentals that drive stocks in the end; and Apple’s economic fundamentals remain superb.

Disclosure: Long on Apple; short on NFLX

Also read Will iPad 3 Boost Apple's Momentum? And 7 Lessons from Great Marketers of Apple,. . .