Investing: In Terms of Perceptions

Changing negative perceptions about a business or an industry takes time. Here's an example: The increasing technological sophistication of Detroit's automakers has yet to be translated into higher share prices, let alone fatter profits. Why? The new business models of GM, Ford and Daimler-Chrysler are being overshadowed by their buying of customers with big-money discounts, cash-back incentives and zero-per cent financing.

Here's the bottom line to an investor like you: That perception, justified or not, yields lower stock prices, which are reflective of their perceived bottom lines as well as their perceived future. And if you are buying in hope of higher prices, probability based on perceptions alone say otherwise.

Here’s why the market’s reaction can be so poor. As American businesses within the sector see their profit margins dwindle to the worst in the industry, the market sees this and drives share prices to reflect the perceived value. And this is no illusion or myopia, as there are real-life commitments that contribute to the negative perceptions.

For example, Union pensions and health-care costs place bludgeoning red marks on their balance sheets; and only an influx in cash, multiple deaths and/or rising equity markets can erase it. When this will change will depend on turnaround plans and PR by the industry itself.

How should you deal with overall market perceptions like that? Simple. Pay attention to them, but develop one of your own Make sure that YOUR perceptions are in-line with the realities of the economy and business potential for growth. Anything less and you will be found buying the dogs of the market or missing the double movers.

Always keep in mind, though, that every market is a crowd; and crowds have mass psychology that seems to reflect and act as one entity. As such, a powerful member of the crowd like a pension fund can often influence the rest by simply moving their money. And that can induce panic which seems to defy both time and space.

Still, make sure to watch the money flow. Take note of those who are accumulating positions. Whenever the big-money guys start buying, for example, it is because of their perceptions. They are not in the business to lose! Their pockets are too big and too important!

A word of caution about analyst perceptions must prevail, though. You will hardly hear of analysts giving all-out sell signals, especially when their bonuses count on you buying and sustaining their propositions. Their perceptions are based on marketing, NOT truth. So pay less attention to their market calls, like buy, sell or hold; but do pay attention to their future earnings upgrades and downgrades.

When analysts upgrade earnings, there is a host of accounts waiting to pounce and support that supposition. Call it greed or whatever. The point is that your perception has to be based on what the market will do emotionally. In this case, volatility is good, otherwise, you have a flat market and little profit for your risk.