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It is an unfortunate and sad reality that most people do not like to think for themselves if even at all.  That is why television reality programs and entertainment news shows and television itself for that matter are so popular: it gives people a break from thinking about their own lives and gives them the opportunity to watch others live their lives.  The same attitude has moved into the investing practices of may individuals as well.

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I came across an article today on Microsoft’s MoneyCentral website called “Markets face ‘irrational pessimism’” which touched on this exact point: that people do not use their own minds but rather simply follow the crowd.  While the focus of the article is on General Electric (GE) (which for transparency’s sake I will mention that I am a shareholder), the overriding theme is how certain companies, although they are struggling in some ways, are seeing their stock prices driven way down below their true values based on nothing more than media hype and panic.

While the point of this post isn’t the role media plays in the economy’s downturn, it bears mentioning that many people look to news outlets as their sources of financial information, so all of the “doom and gloom” and pessimism starts there and filters down to the common people.  That being said, some of the responsibility falls on these media outlets, but the bottom line remains that people should always do their own research into financial matters.

Getting back to the point, people are too quick to act upon each and every piece of news they hear whether in the media or from friends/family.  It is just too easy to take each piece of advice or news at face value and avoid spending the time doing research on their own.  This especially true in the case of conglomerates such as GE where there are many different independently operating units that each contribute to the company as a whole (which is one of the reasons why this specific company was used as the feature in the article).  Simply because one unit in particular is struggling, the rest of the units may be operating at optimal efficiency but the focus is always going to be on the bad news.  This causes problems when the information available only concentrates on the negative, giving the impression that the company as a whole is doing poorly.  That in turn leads to a sell-off of the stock leading to a severe under-valuation, similar to the way the opposite happens with unnaturally positive coverage and its cause of artificially inflated pricing.  The article further expands upon this issue in depth regarding the valuation of the parts versus the valuation of the whole regarding companies with multiple divisions.

This trend is further evidenced when one particular company releases negative news and as a result, an entire sector is dragged down.  How the results of one, independent company can be a sign that all companies within a sector will follow suit is beyond me, but this chain of events happens quite often in the markets.  It even occurs on positive information, where a company posts better than expected profits for example, leading to an increase in share price and the sector as a whole shares in this sequence.

The truth of the matter is that most people do not have the knowledge, patience or resources-even though the last part is readily available and free from a variety of sources.  Even those who have money managers and stock brokers at their disposal are guilty of not listening to reason all of the time and let their fear take control of their financial decisions.  While at first, relating the state of the economy to a movie quote may seem improper, the fact remains that this particular line from “MenIn Black” holds true for much more than simply aliens and money.  There is a line that goes, “A person is smart. People are dumb, panicky dangerous animals and you know it.

“ This is perhaps one of the most truthful quotes ever uttered.  One educated person can see negative news as either a hiccup or a sign of things to come, but a group of people lacking the same level of knowledge and experience will see it as the end of the world and overreact, as we are seeing in many instances within the market right now.

This entry was posted on Sunday, March 8th, 2009 at 10:28 pm and is filed under general. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.