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When my children were younger, I used to take them on horseback trips through the wilderness, such as the Deep Lake area of Northern California. Deep Lake is very small, but very deep and secluded, and swimming in it are some of the largest, most stubborn trout I've ever seen. They'd sun themselves in the shallows, and for hours on end we'd try to tempt them with all kinds of bait, to no avail. All we could do was watch them in dismay until we eventually lost patience, went back to camp, ate our dehydrated beef stew and talked about the fish that got away.

Last week, I

discussed

Royal Gold

(RGLD) - Get Report

, another fish that got away.

I shorted this stock in late January as it made a double top, and I was then stopped out in early February as it continued higher. I felt it was a good entry and a good stop, but what bothers me about the trade was that I took it off my screen after the stop and failed to follow through on the idea. I lost patience. When a

Barron's

article came out last week, the stock got dragged down from $19.45 to $12.70. Yes, it was aggravating, but it was also a good reminder about patience, something we sorely need in this market lately.

Lamenting Lost Opportunity
Here's a year-to-date look at Royal Gold

However, I also mentioned that I was looking for opportunity in the counter-reaction off the bottom. Sudden, dramatic price changes attract attention. They are compelling and often invite counter-reaction, so I felt that a new opportunity was presenting itself.

A Reader's Outrage

But some readers emailed me, horrified that I'd contemplate a long position in a stock with such dismal fundamentals. Martha, who is short Royal Gold, wrote:

"You didn't seem to grasp the real reason that the stock was down so much: the fundamentals! That Barron's article just alerted the whole world to the fact that RGLD is massively overvalued. Technical support means nothing when the whole world thinks the thing is worth $9 at best. I predict it will see single digits in the next two weeks. ... The one thing I believe in most is that, in the long run, fundamentals matter -- so unless gold goes to $800, I believe RGLD will come back to single digits. I just have to be prepared to wait!"

I agree with you on some of these things, Martha, but I also find a part of that type of thinking dangerous, especially in today's market.

The first thing I believe we always have to ask ourselves is, "What is it that actually moves a stock?" Valuations do not move stocks. Fundamentals do not move stocks. Technicals do not move stocks. Tea leaves do not move stocks. What moves stocks are people's perceptions and beliefs, and the actions they take based on those perceptions. People who are buying and selling and the intensity of their actions are moving those stocks. We really need to know what people are basing their perceptions on most of the time.

In a logical world, people would base their perceptions on valuations and fundamentals. It makes sense. If everyone used common sense, we would only be buying companies with lots of cash, solid earnings, honest management, real products, dividends, etc. Only the "good companies" would climb in price and the overvalued companies would fall. Investing would be easy. I'd like to think that all I had to do was choose a stock with "real value," wait patiently for the market to see it my way and watch the price gravitate toward that value. Unfortunately, it's not always that easy.

Overriding the Logic

As John Maynard Keynes once said, "There is nothing so disastrous as a rational investment policy in an irrational world." If the tech bubble taught us anything, it's that greed and fear are quite often stronger than logic. In today's market, people are buying and selling for many reasons, and everyone has a different time frame in mind. Some are watching valuations, some are watching technicals and others are even throwing darts. They're all acting within the greater context of the general market mood. The gravity of emotions is pulling as well, affecting perceptions.

Even when a stock price does eventually gravitate toward "real value," we've often left a lot of potential on the table in the meantime. In 1999, many bears were screaming about fundamentals and the insanity of tech prices, and they were right. Now that we're down 75% from the March 10, 2000, top, they can gloat. But in refusing to see that the market doesn't always act logically, they missed out on one heck of a ride up.

Royal Gold was a similar case last week. I agree with the aforementioned reader in that if the world thinks the stock is worth $9, then it will move to $9. But not everyone is basing the trade on fundamentals alone. Fundamentals contributed to my original decision to short it. However, it kept climbing because perception moves a stock. If the world thinks it's worth more, it will climb higher despite the fundamentals.

We have to take more variables into account. According to psychology, for every large sudden action, there's usually a counter-reaction, quite often one that completely disregards fundamentals. Based on that, Royal Gold had a pretty good bounce from $12.70 to $16.89 last week. It may very well continue down to single digits, based on valuation, but in the meantime, I wouldn't want to miss out on a few points of potential in this stingy market.

To find that potential, I believe we have to expand our thinking. We can't afford to have tunnel vision. If we can find a balance among technicals, fundamentals and psychology, we'll have a much better chance of maneuvering through this challenging market. We can wait all we want, but sometimes the fish just don't see it our way.

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Ken Wolff is founder of MTrader.com, the first educational daytrading site on the Net, and co-founder of Investingonmomentum.com, a Web site devoted to short-term potential for retirement accounts. TheStreet.com has no affiliation with InvestingOnMomentum.com, and no endorsement of InvestingOnMomentum.com or momentum trading is intended. At the time of publication, Wolff had no positions in any of the securities mentioned in this column, but positions may change at any time. While Wolff cannot provide investment advice or recommendations here, he invites you to send your feedback to

Ken Wolff.