Does Stock Price Depend Excessively on Impression Management? (Part 1)
Why should you care? Stock price should be proportional to earnings. You buy or hold stocks if business prospects appear bright. The latter could be something stock brokers and the media tell you: you may also be the clever type who goes against the general trend. However, what could this have to do with Impression Management?
Stock investors are human! It is only natural for people to try and influence images in the minds of others. Professional communicators may use Impression Management in systematic ways, but no stock market participant, at any point in the trading ring, is immune to the phenomenon. One of the main reasons for stock value to be hidden is that so many people try some forms of Impression Management in order to manipulate investment decisions.
Trust and Facts Protect Stocks from Impression Management Abuse
Why do highly-paid executives resort to insider trading? There are huge differences between the facts to which they have access behind closed doors of offices, and rumors that float in various stock market circles! When did you last see a review of past investments by companies in which you have stocks? Our memories are known to be chronically short, so it is easy to forget about business projections made to us. Much is made of past stock price trends, but real business is about the future, and managing uncertainties.
Consider due diligence. No stock Guru or acquiring company will sign on a check until this process is complete. Yet, there is no comparable product for small stock investors. Retail investors buy and sell stocks based on what other people say about them. Advertising campaigns make big impressions on our minds. How did you feel about the famous banks before the sub-prime news first broke in 2007? What do you feel about Greenspan now that he is a consultant to one of the biggest gainers from sub-prime? Is there a way out for the future?
Invest Actively in Stocks You Know Intimately
Impression Management will not work when you have first hand experience. I can trick you in to buying a new brand of beverage just once! However, I can string you along about nuclear power plants for years, if you do not know your engineering. Drop the diversification baloney and focus on sectors and industries which you know best.
Think of your job or own business. Do you recall how times have changed? How different work is today from when you first started your career! The blue chip story of stock investment is buried. The best corporations make foolish blunders. Companies written off by stock analysts turn corners quietly. Business is fluid, so stock investing has to be active. There could still be a few stocks around in which you put money for life, but they are rare. Tracking a stock price and a stock exchange index are far from enough. Daily company operations and policy changes are what you need to watch.