Investor panic and euphoria is an amazing thing. Take the example of Apple and investor's perspectives on yesterday's earnings report. There is no better example of investor tendencies to react emotionally that the recent angst regarding recent Apple share price movement.
The rally in Apple stock has been incredible by any standard.
Over the last several years, the stock has gone up exponentially and investors have been rewarded by investing in this tech titan.
And because results have been so strong, investors have grown accustomed to consistent upward price movement. Straight up is the expectation and, when that does not occur, discomfort and panic sometimes emerges. (Track Apple Stock Here)
With Apple stock having slipped $80 over the course of last week, some in the analyst community were suggesting that Apple might retrench further. "The end of Apple appreciation is over", some postulated. One hopes that analyst perspectives are based on rational viewpoints regarding cash flow and future earnings potential (though this is not always the case). Recognize that analysts, like all investors, are impacted by one's experiences and emotions. There is no unbiased perspective.
As an investment manager, we sometimes encounter emotions from investors that are reactionary in nature. Just this week a call came into our office saying "What's wrong with Apple? Should I sell? Is something wrong with this company? I'm very concerned!". Naturally the concern was about downward volatility; upward volatility was happily accepted. Suddenly, the conviction that this investor had in Apple as an investment vanished based on five days of price movements.
Of course, Apple blew past estimatesand the stock rallied strongly in recognition of strong overseas iPhone sales and continued earnings and profit expansion. And in a moments notice, where once concern reigned that the end was near for Apple as an investment, suddenly conviction return. 24 hours earlier panic and concern was the sentiment. Now, after one earnings report, belief was magically restored for this concerned investor.
Short-term swings in conviction can often be traced to emotional reactions to news and headlines. And short-term swings as a belief are a key indicator that a more rational perspective is necessary. When a stock has a strong rally or prolonged downturn, investor sentiment ratchets up and panic and euphoria take hold.
There's a reason why most individual investors are challenged to beat market returns; emotion impacts investment decisions and this is the least most effective strategy to employ when managing a portfolio for the long-term. Yes, sentiment matters for sure, but it cannot be the overwhelming investment driver.
This is not to say that analyzing short-term data and headlines is irrelevant; that is not the case. There are significant benefits for a portfolio strategy if one assesses the short-term impact of news on a stock or investment's price. But one should look at this as merely A factor and not THE factor in making an investment decision. A rational calm perspective is needed even when assessing short-term news.
What you can learn from Apple's recent results is to stop for a moment and not focus so much on price movement on the short term. Instead, step back and take a rational perspective on any investment and weigh short and long-term factors and conditions. Be balanced and try not to react. Reacting emotionally is your least effective tool in tackling today's uncertain market environment.
Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of the DWM Investment Committee at Destination Wealth Management. Michael is a CNBC Contributor and appears regularly on the network. DWM is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010 and 2011.