Trading Educators Blog
Is it Really All About Image?
Preconceived images have a powerful influence on our decisions. If we believe that a company has a hot new product, we can't help but think its stock price is bound to go up. Trading the markets can be 99% psychology at times. The image of a company can often mean more to us than actual earnings reports, but the masses can be fickle and it is vital to consider as many factors as possible while outlining a trading plan.
Image isn't all bad. Perhaps you believed that recent company commercials were effective. The company was projecting a good image and you decided that the upcoming earnings report (released last week) would boost the stock price. But when a company's image is inaccurate and based on nothing but hype, you may regret acting on this biased information.
Images can significantly influence our estimates of stock prices. A group of advanced business students enrolled in a securities analysis course were studied. They were asked to make decisions regarding a set of industry groups on the New York Stock Exchange. Examples of the industry groups were computer software, pharmaceuticals, railroads, and managed care. Unknown to the participants, half of the industry groups consisted of high performing stocks (greater than 20% return) while the other half consisted of low performing stocks. Participants rated each industry group on whether they had a positive (for example, value, activity, and strength) versus negative image. They were also asked to estimate the rate of return for each industry group. The researchers found that image biased estimates of returns. The better the image of a company, the higher the estimated return. Despite people's estimates, a company's image had no relation to reality.
Don't let your preconceptions bias your decisions. Be aware that sometimes you may have a positive image of a company that may override your logic. How can you stay unbiased? The best solution is to double-check your facts. Get earnings reports or whatever data you need to make the best educated guess. It's impossible to be right all the time, but if you based your investment decisions on a combination of cold, hard facts and an astute reading of market conditions, you will profit nicely.