I admit it. I fell victim to the “opinion” trap.
One of the most difficult things for an investor to do is to avoid making decisions based on something you’re “sure” of. I put that word in quotes because what we think we know is often very wrong.
Here’s some backstory: In 2004, 2005 and early 2006, when oil and gas stocks were motoring higher, a friend of mine kept insisting that those stocks were “long in the tooth.” It was a reasonable, intelligent-sounding assumption, since many of those names had been rallying for months, and appeared ready for a breather. Because this guy is an accomplished investor and someone who knows his market rules in and out, I fell prey to his opinions.
It seemed so wise to avoid stocks that had clearly run too high already. Problem was, they just kept rising – and I missed chance after chance to get in. Here’s just one example, Southwestern Energy (SWN), which notched huge run-ups during that time, but as you see, offered obvious entry points on pullbacks.
But since I was so convinced that my friend was right about oil and gas stocks being past their prime, I missed these chances. In fact, I ignored those stocks completely, leaving a lot of winners on the sidelines.
So that’s one form of listening to opinion, rather than market facts. It comes about because you think you hold the most intelligent or sophisticated view.
There are many forms of letting your opinion get in the way of investing results, and I realized that I have been making another mistake recently. But in this case, it’s not too late.
This latest mistake was relative to Amazon.com (AMZN). Even before Apple’s (AAPL) announcement about its iPad, I was already writing the obituary for the Kindle. I had noticed that Amazon’s earnings and sales growth have been growing at good rates. I also saw that its stock price was holding up nicely, even during a general market downturn. Amazon shares have been consolidating gains in an orderly fashion, never falling too far beneath their 10-week average.
Despite this solid performance, I was convinced that Amazon was toast.
My mistake? Forgetting that Amazon’s business is more than just the Kindle. In fact, when the company reported its fourth-quarter results in January, it said that revenue from books, DVDs, CDs and other media had risen 29%. Customers are increasingly turning to online retailers in a search for bargains.
But I had fallen into a mental trap of looking at the entire company as just a Kindle seller. Mistake.
Now, will iPad – or maybe even some other product – be a Kindle killer? Maybe. But see, obsessing about that now is what’s called “having an opinion.” It’s great to understand a company’s story, and know what’s driving sales and what could be a danger. But right now, Amazon’s business is healthy, and its price is approaching a buy point.
And that is fact, not opinion.
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