Hurricane Psychology, Buying Pessimism (RIMM), and Finding Redemption November 4, 2012, v2, n8
|Bob Hitting Bottom|
"The word "forgive," according to the Chambers Dictionary of Etymology, comes from the Old English for-completely + giefan-GIVE."
At the meeting Bob recounted his story and was amazed that many in the room could relate. He had spiraled downward driven by forces and compulsions he was only dimly aware of, yet many in the room had parallel stories of self-destructive behavior. Like others in the room, Bob had poisoned many of his relationships with ego-fueled ambition and narcissism. Bob realized that his life wasn't just about him. And as he looked around the room, and listened to the stories of other alcoholics, he realized that he had hurt many good people.
Bob went home that night made an inventory of everyone he had hurt. He decided that suicide would be no use if he didn't at least try to make amends to these people for the pain that he had caused them.
He first called his parents and apologized for virtually destroying the family business. He explained his realization that he was alcoholic and out of control. He apologized for past behavior and volunteered to work 80 hour weeks for his family for two years in exchange for room and board. Eventually they let him come back to work in a minor capacity, but not without testing his sincerity.
As in the quote that opens this section, in order to win redemption from a life of narcissism and petty resentments, one must give completely of himself. After his fall, Bob spent two years working off his moral debts and maintaining his sobriety. During this period he regained some social support and mental balance. With the blessing of his family, he left the business to begin his new career in technology. Bob started and grew his own technology company. He has been sober for 15 years, and what's more, he recently started a happy, healthy family of his own.
We'll address what Bob did to get out of his rut later in the newsletter. But first, we'll look at the case of companies in a slump: RIMM and Coal.
|Redemption Investments? RIMM, Nokia, and Coal|
RIMM management has made a series of blunders that in any other industry besides smart phones would not be so quickly fatal. But RIMM lost brand credibility and has fallen far behind. Nonetheless, 10% of the global smart phone market is not a bad place to be if your customers are loyal individuals (or inert corporate clients). Rumors of RIMM's demise have been swirling for more than a year and intensified this summer. But lo and behold, RIMM stock is rising from the ashes. Is this a value-play or an honest-to-goodness redemption?
Don't expect RIMM to recapture its former glory. There has been open dissention and a loss of shared passion. See this open letter for details. That said, the leaks appear to have turned positive. These product development leaks show an impressive pipeline. Given that expectations are the driver of risk taking among investors ("buy on the rumor"), we could see a continuing rally in RIMM shares until the new phones are released ("sell on the news").
We have already seen increased Liking of RIMM by online investors. The green line in the chart below quantifies the amount of Liking expressed about RIMM and RIMM products in the financial social media from Nov 2010 to Nov 2012. Note that Liking has risen substantially off its lows.
We are also seeing that RIMM is re-emerging among its peers in overall Sentiment. Note in the chart below that Microsoft (MSFT) typically drags the floor in sentiment. Apple (AAPL), which usually rides high in sentiment, had a serious sentiment decline this summer around its price peak, and it is now below Google and RIMM in overall sentiment value. Meanwhile, Google surged in sentiment following its July 19th 2012 earnings report.
In the case of RIMM, a short-term redemption may finally be at hand. But the safest way to be involved is to buy the rumor of redemption. For companies, long term redemption is nearly impossible. Remember Nokia (NOK)? Amazingly, the one year Fear and price chart on Nokia looks incredibly similar to that of the Coal industry, below.
The coal industry has been down in the dumps lately due to falling Chinese demand and concerns about climate-related regulation. "Sandy" is again focusing attention on the human consequences of greenhouse gas build-up, as this Bloomberg cover testifies. There has been a recent price surge in Coal. Whatever the cause, the long-term outlook for the coal industry is negative in the U.S. In the image below there is a recent surge in Fear (green line) in the Coal-industry ETF (KOL) to multi-year highs as the U.S. election approaches, the stock prices hit new lows, and more utilities turn to natural gas.
I'm not endorsing a long-term coal investment. But from a contrarian point of view, coal is certainly interesting. And some U.S. stocks like BTU have good cash positions and are exporters.
Is "redemption" likely for the coal industry? No. Coal is a chief culprit for global warming and mercury in seafood, and it's unlikely to become less regulated or more favored anytime soon.
Redemption is not easy for companies, and likewise it is not easy for individuals like Bob. That said, as individuals we have more control over our individual destinies.
Just as with athletes, investors will eventually, and often repeatedly, experience slumps in performance. On the psychological level slumps dent confidence, paralyze decision making, and impair risk assessment. During a slump personal balance is lost, and impulsive risk-taking alternates with paralysis. On the biological level, negative feelings are seared into the amygdala, changing how we remember, assess, and respond to future risks. The long-term consequence of a deep slump is a kind of financial post-traumatic stress disorder (PTSD) in which our decisions about risk can become permanently distorted. For someone like Bob, alcohol and cocaine numb the despair associated with a slump. But these chemicals also biologically impair resilience mechanisms, resulting in a steep downward spiral of interrupted sleep, impulsive behavior, and an eventual blow-up.
Once in a slump, climbing out is not quick or easy. There are two analogies applicable to investors in a performance dip, one from baseball and one from golf. Ted Williams of baseball fame once said the key to great hitting is to wait for your pitch. Baseball success is associated with a rapid assessment of the ball's trajectory and a snap judgment of "yes" or "no." But unlike baseball, a golf ball waits for you to hit it. As a result, golf is about deliberation, practice, and precision. Tiger Woods took a year off professional golf to readjust his golf swing. The key to getting out of a slump is to climb out one successful trade at a time - one perfect swing at one perfectly placed pitch - to rebuild confidence and motivation.
Working out of a slump requires 1) accepting the slump for what it is, 2) focusing on what works in the current environment, 3) jettisoning what (and who) doesn't help, 4) readjusting your perspective to one that supports profitability, and 5) waiting for YOUR PITCH. Unfortunately for resentful investors, it is situations like this year - when markets rally on persistent gloom - that they are again traumatized. As a result most investors have been missing out on a bull market.
So how do we stay flexible in today's volatile markets?
Mental adaptability is the most significant trait behind investor success that we've identified in our online personality tests. There is a method in the challenge of climbing out of a rut, and it is rooted in using your mental flexibility to ask good questions and try to see things differently than the status quo.
If you're in a slump now, get out a pen and paper and go through the following steps for yourself:
The guidelines above are not a silver bullet, but they should provide a solid start.
Next week we will explore how to read the indicators of when a company, country, or investment has what it takes to pull out of a slump...
Trading recap from last week: Buy on AMD was wrong, as AMD dropped about 1% from the week's delayed open. Short on Apple (AAPL) was correct, as AAPL dropped about 2.6% from the week's delayed open. Mild long on S&P 500 was wrong, with a 0.3% loss from the week's open.
Week ahead: We're still seeing a mild buy on the S&P 500 this week, which may be due to pent up tension due to the upcoming election. We're also seeing a one-week short on Netflix (NFLX) due to lots of love following a good earnings report (overreaction), and a one-week short on Exelon (EXC) which despite a recent price drop, is seeing signs of denial among investors who continue to like the high dividend and low P/E ratio. (See Disclaimer below).
|Housekeeping and Closing|
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Happy Investing!Richard L. Peterson, M.D. and The MarketPsych Team
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