When Investors Act Like Sports Fans

NEW YORK ( TheStreet) --
"What some call emotion, some call results"
-- An Apple ( AAPL) bull

Apple bulls are walking on sunshine right now. I can hear Katrina and the Waves playing in the background.

And that's good. I never have a problem with people making money.

That said, you absolutely must exercise caution when emotion starts influencing the discourse. One reader noted that when Netflix ( NFLX) last year was rallying from $50 to $300, the "comment wars" got more and more intense until the company's fundamentals brought the stock back to earth.

The reader compared those debates to what has happened recently when articles with long-term bearish outlooks on Apple have been published.

There are similarities in the intensity of the arguing, although Netflix was moving up on air and false hopes while Apple's move up is "real." In fact, shares could continue to rise and it wouldn't be irrational.

Apple shares are moving up because the company is firing on all cylinders. Business is good and, for the time being, more than sustainable.

If you pay attention to the "comment wars" the reader refers to, however, you do see that some Apple longs are beginning to sound like the longs who live and die with lesser companies such as Netflix, Research In Motion ( RIMM) and Sirius XM ( SIRI).

I consider this an important harbinger of things to come. If nothing ever goes wrong for Apple, this conversation is moot. But that does not mean it is not a conversation worth having.

Assuming my outlook or some other long-term bearish case plays out and Apple begins to falter a year or two down the line, will Apple bulls do what NFLX, RIMM and SIRI devotees have done? Will they stay long and defend their stock to the death? Will they start talking and thinking more and more like sports fans?

The most loyal RIMM and SIRI longs use the pronoun "we" when they refer to the company. Just like sports fans, they feel like they have become part of something and need to defend it no matter what. They live and die with their stock and bleed the company's colors.

If you have experienced success as an AAPL long, it has very little to do with emotion. Certainly, some level of emotion kept you in the stock during its many somewhat scary dives over the last year or two.

I am not sure how much I associate sticking with long-term conviction during near-term, noise-induced weakness with emotion, though; instead, when fundamentals do not change, it's relatively boring, smart investing.

You have zero to do with the direction of a company or the trajectory of its stock. Your emotion drives absolutely nothing. All it can do is help you lose money somewhere along the line.

Thinking that your emotion plays any sort of role is akin to the belief that the louder you yell at your television and the tighter you clench your fists and cross your fingers, the better the chances are that your hockey team will score the game-winning goal in sudden-death overtime.

I bought AAPL for an average of about $286. I sold it for around $350. I rode an Apple January 2014 $600 call to considerable profits earlier this year.

When I sold the stock, emotion certainly played a role. I left money on the table, but I did not lose any. And that's really the key. I will take emotion shaking me out of a position over keeping me in one any day of the week. For every one that ends up running, more than a few would have ended up producing losses. On the option trade, I made the correct choice. I had a big profit and I took it. I moved on.

If I owned the stock today and found myself getting all caught up in the euphoria, I would take my wildest price target, knock about $150 off it and sell a covered call at that strike.

So, today, if I were long AAPL and thought it was headed to $750 by the end of the year, I would immediately sell AAPL May $600 calls against my position.

If my shares got called away, I would knock about $20 off of AAPL's market price in that moment and sell the closest-in, cash-secured put at that strike. If they did not get called away, at May expiration I would write a June covered call at a strike about $100-$150 below my latest ambitious price target.

If somebody is willing to pay you thousands to risk giving up your shares or the same to sell you shares on a dip, why not take them up on the offer?

I consider this strategy a prudent and proper balance. It beats unbridled and fanatical passion or the fear of closing a position only to regret the decision later.

At the time of publication, Pendola didn't have any positions in stocks mentioned.