NEW YORK (TheStreet) -- There's nothing more interesting than studying investor psychology.
Fortune's Philip Elmer-DeWitt wrote a must-read piece (see the link at the end of this article) on what happens when investors get too emotional over a stock. DeWitt narrates a real-life worst-case scenario where an Apple (AAPL)-only hedge fund manager loses millions in client money. It's all gone. Just like that.
I have interacted with that fund manager several times over email. While we had our differences, I have no reason to believe he's anything other than a) a good person and b) distraught over what went down. So, that said, I am not here to kick him when he's hurting; rather I want to do two things in this article:
1. Outline, with a look in my eerily accurate rearview mirror, the process of what happens when emotion takes over; and2. Apply that psychology to the notion -- which I introduced Monday -- that Apple's Board should, at the very least, consider making a move with Tim Cook. For as much time as I have defended the still-dominant Apple in recent months, ever since Steve Jobs' death I have taken a long-term bearish stance on the company and, generally, been neutral to bearish on the stock. On several occasions, I discussed the role of emotion and how it was fixing to blow up quite a few overweight AAPL accounts.
Quick disclaimer: I don't rehash this stuff to show you how "right" I was -- because, heck, we can find equal parts "wrong" -- rather I do this because it can save investors from easily avoidable pain. Most recently, from Jan. 25:
To dig your heels in -- because selling now would compound [y]our original mistake . . . -- are famous last words for so many investors . . . that type of "strategy" . . . would crush quite a few retail portfolios.And, from way back on April 27, 2012:
With each victory, you become all the more certain that there's no way -- God willing -- you can be defeated. A little bit of loyalty, and Tim Cook and China will take care of the rest.
Ironically, seeing profits slowly start to get smaller only strengthens your resolve. You hold. You listen to the pumps to buy on the dips. And it keeps working. You're rich. But for every disciplined investor who manages his or her position properly, there's at least one devotee who stays all-in and keeps digging himself or herself a deeper hole. Before you know it, your otherwise rational mind fooled you into staying in a position from 700 down to 250 because you just knew it had to make it to 1,000. It was destiny.That's the process of emotion we have seen unfold with AAPL in recent months. Investors get emotionally attached to the name, go all-in -- or close to it -- and often leverage their positions with call options. Recipe for almost-certain disaster, if not now, if not with AAPL, at some other time, with some other stock. Anyway, Apple, as a company, finds itself in a similar spot. It has gone all-in on Tim Cook. That decision "got made" (sometimes poorish grammar just sounds better!) on Steve Jobs' watch. I acknowledged this reality Monday:
Steve Jobs is gone. Yes. One of his final decisions might end up being one of his biggest mistakes -- leaving the CEO gig to Tim Cook. (Others, including the folks at MacDailyNews, will say Jobs erred most in the way he handled his cancer treatment. Maybe so, but I just can't bring myself to go there.)
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Jim Cramer + 20 Wall Street pros
- Intraday commentary & news
- Real-time trading forum
- Actionable trade ideas
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV