Is There a Sucker In You?: Wall Street's Rules, Part 3

NEW YORK (TheStreet) -- In the first part of this series we talked about the importance of making your investment decisions more about the bottom line and less about perpetuating the "rules of investing" or sometimes the unspoken myths that serves to only qualify your status as an investor while yielding very little results.

In the the second part we looked at the myths surrounding portfolio diversification.

In this article we are going to focus on investor psychology and how a trained mind can look for not only ways to profit, but equally important, not being a Wall Street sucker.

Don't Talk to Strangers

Wall Street reminds me sometimes of that sleazy guy in the old Volkswagen van driving around neighborhoods looking to handout lollipops. As adults you would think we'd know what his intentions are. However, those who are always quick to approach the van with eyes gleaming carrying high expectations often have no clue.

While careful due diligence will remind me not to talk to strangers, not everyone appreciates a bearish sentiment. The term these days is "basher." Look up the word and you will likely see my name next to it.

Be that as it may, I speak with these types of investors on a daily basis and it is often sad to hear the stories they share once they were finally allowed to exit the van. As you try to convince them that the lollipop wasn't worth it, they are off looking for the next van.

Which reminds me of one of the things making Wall Street appear scarier than it really is -- Facebook's ( FB) initial public offering gaffe.

Another example is Research in Motion ( RIMM), where although it has lost 95% of its value over the past three years (-51% this year alone), its management continues to insist there is nothing wrong with the company.

But in RIM's case, this leads me to one of the most important rules of investing: Don't' try to catch a falling knife because you just end up getting hurt.

The question is, why has it taken this long for the sell recommendations on RIM by analysts to start coming in? The stock has been in a free-fall for the past couple of years and the company has shown very little interest in making capital investments to compete against APPL ( AAPL) and Google ( GOOG) in any meaningful way.

Yet, over the past seven months though it regularly revises guidance downward while issuing warnings of product delays, not only has RIM received several market perform recommendations, but in the process it was suggested as a buy.

So who is there to protect us from the roaming vans if the analysts are seemingly unfit? More than anything, realizing this is what separates professional investors from amateurs -- falling in love with a possible "turnaround story."

However, we often forget that Wall Street very rarely send companies into the sunset with nice farewells.

If a stock like RIMM or Nokia ( NOK) or even Sprint ( S) that is trading at or near its 52-week low, there is a reason for this. However, many get caught in the attractiveness of a low-priced stock and think that they have indeed found that needle in the haystack. Sometimes if you step back you will realize that the entire haystack itself was sitting in a dumpster and the needle is not a prize but rather van looking to hand out lollipops.

While there is an appeal for these stocks -- or the lure for the probability of above average gains -- however, all it takes is some simple math to realize how little sense it makes.

I continue to use RIM with this example because even today as the stock is trading around $7 investors continue to remind me of how undervalued it is by offering the same repetitive arguments. The stock has gone from $140 to $7 and somehow investors want to believe it will make it back there. But that's not going to happen. In fact, it will take a miracle for RIM to stay above $5 the rest of this year.

Bottom Line

This is absolutely one of the most destructive rules of investing, thinking that a fallen stock will somehow recover significant portions of its gains. Price is only one factor of investing.

The goal is to discover value -- RIM, Nokia and Sprint don't offer that. The goal is to buy good companies at a reasonable price. Focusing solely on price as a basis for an investment will render you a hamster chasing a carrot.

Not only does it get you nowhere, in this case it makes you a sucker.

At the time of publication, the author was long AAPL and held no positions in any of the other stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

More from Opinion

Red Hat CFO Tells TheStreet: Tech Trends Are Still in Our Favor

Red Hat CFO Tells TheStreet: Tech Trends Are Still in Our Favor

Throwback Thursday: Intel Edition

Throwback Thursday: Intel Edition

Intel's Next CEO Should Try Harder to Protect Its Flanks Against AMD and Others

Intel's Next CEO Should Try Harder to Protect Its Flanks Against AMD and Others

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

Wednesday Wrap-Up: GE and Facebook

Wednesday Wrap-Up: GE and Facebook