You might have felt upset or defensive — a natural position for investors when they believe their stock is under attack. But in this case, Cramer was mocking the sudden shifts in Wall Street psychology that often define a trending stock. Watch Cramer’s video here — it’s well worth it.
Psych!
With that in mind, I wish to discuss the psychology of the stock market and one underlying principle that most escapes most investors: The graph of a stock’s price, absent of specific concrete news, is a graph of investors’ psychology.
This is the reason why most stocks are up on days when the major indexes rise, and vice versa when those indexes fall. It’s why I cannot completely dismiss technical analysis as voodoo, and the reason stocks normally trade in trends.
Humans Are Irrational Creatures
As much as economists like to theorize that markets are perfectly efficient, reality suggests a different story. How else would we get the numerous bubbles we’ve had through the centuries, from the Tulip Bubble in the Netherlands, to the dot-com bubble, to the recent real estate bubble when the banks could “do no wrong.”
During this time you saw soaring asset prices, and just about any company involved with the industry soared along with them,. If you made a short-term bet against the herd, you got stampeded. I can tell you, as a writer, when Apple Inc. (NASDAQ:AAPL)’s stock was soaring to levels I believed were overpriced (not crazily overpriced mind you) just overpriced, the backlash from “the believers” for writing something negative about it was large enough that for personal comfort, one thought twice about it.
Back to Cramer
In the video, Cramer mocks the sudden turn in psychology against Apple, sarcastically stating: “Whatever product that is coming out in September is a clear loser. We haven’t seen it yet, but it is a loser.”
“Let’s just call it as it is,” he continues:
… There has not been a single piece of good news about Apple for 300 points, and today is just another day when the news is just horrendous. … These are all downgrades on growth and missed quarters. When you see someone so certain that not only that this quarter is bad but the next quarter is bad, I think tomorrow we get a downgrade and they’ll say that 2014 going to be bad.
Cramer is sarcastically making his point, and I completely agree with him. When Apple Inc. (NASDAQ:AAPL)was trading up north of $600, it could do no wrong. But now that psychology of the market has shifted against Apple, it can do no right.
Today, the negative articles against Apple far outpace the positive. You might be an Apple investor and seen the headline, “Cramer Calls Apple Inc. (NASDAQ:AAPL) the J.C. Penney of Tech,” and have a knot form in your stomach.
The temptation as is to sell, to protect yourself against further losses. As a stock falls in value, people cut and run, leading to more pessimism about the stock price. Stocks bottom generally when expectations are reduced to the point where they can be beaten. Once beaten, psychology shifts, and the trend changes, unfortunately, if you’ve sold during this time, you’re out of luck.
Contrast
You might have noticed the run Google Inc (NASDAQ:GOOG) has had as of late, from $500 to around $800, a whopping 60%+ increase in the last two years.
Google’s certainly firing on all cylinders, but if you look through the press, do you see many sell recommendations or downgrades on Google stock? Most writing — mine included, admittedly — fawns over the prospects from its upcoming Google Glass release.
Only a year and a half ago, I read writers trying to make Google a laughingstock for investing in driverless cars, describing it as “wasted shareholder money.” Today, the technology appears to be tangible (says this bullish writer).
How much negativity do you hear about Google now, as its price-to-earnings ratio expands and its stock rises? I’m not saying Google is overpriced. But as an investor, I want to stay keenly aware when Wall Street believes a company can do no wrong.
To quote Warren Buffet, “You always pay a high price for a rosy consensus.”
Margie Nemcick-Cruz has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple.
