You Hate My Stocks? Great

As someone who loves a good underdog story and loves to buy the stocks of companies that the market apparently hates, I can't help asking: Why do you care if somebody hates your stock? In fact, I'm usually happy to hear from people who look up my holdings and tell me how stupid they think I am.

Now, let me offer you a few reasons why I think you, too, shouldn't care much whether somebody hates your stock.

Different strokes for different folks
Oddly enough, two investors can have very different opinions of a stock and both be right. It all has to do with risk tolerance, expectations, and comfort level. Successful stock selection isn't just about picking the stocks that go up the most in a given year. Rather, I believe that a successful approach incorporates an investor's attitude toward, and tolerance for, risk and volatility.

If you are an older investor who's only a few years from retirement, having the majority of your nest egg in biotech, energy-tech, or other speculative ideas is not very prudent. Similarly, if you're a young investor with years to go before retirement, it might be equally imprudent not to take at least a little risk in your portfolio.

It is entirely possible that a given company or stock has become simply too volatile for an investor's comfort level. Don't forget -- an investment that keeps you from sleeping is not really a good investment even if it goes up. So in this case, one rational investor can dislike a stock because he thinks it is too risky for the expected return, while a separate and equally rational investor can look at the same tradeoff and decide that the expected reward meets her standards and is a good buy.

Performance matters
This is the simplest, but least accepted, point that I can ever hope to make as a writer, Over the long haul, the only thing that really matters in determining a company's stock price is the performance of that company.

Naysayers don't have an impact on revenue, margins, profits, free cash flow, or development milestones. As long as a company consistently delivers the goods, its long-term stock performance will reflect that. Even if skeptics can short the stock, nobody has enough money to sit on.

At the bottom line, it's performance, and only performance, that separates the wheat from the chaff. Whether it's nanotech , steel, biotech, or any other industry, performance determines the winners and losers. No management can float a story forever, and no skeptic can bash forever. Sooner or later, the facts determine the long-term value of the company in question.

New highs require new blood
This is, quite simply, the best reason that I like to see doubters and skeptics talking about my stocks. While I suppose it's mathematically conceivable that a stock could appreciate simply by having a fixed group of investors buying and selling the stock from each other at ever-higher prices, that's not really very likely.

Rather, stocks go up as new investors come into the story and bid up shares. When that new blood peters out, the rally often stalls and the stock price moves sideways. In that sense, then, skeptics constitute a standby pool of potential new investors. As the doubters see a company (and its stock) do well, some of them will ultimately abandon their skepticism and buy the shares for themselves.

When everybody agrees, everybody is wrong Here's another good reason to embrace disagreement:

Generally speaking, by the time a large percentage of market participants agree on something, the game is over. The time to buy tech stocks was not in 1999, when seemingly everybody had bought into the "New Economy" claptrap, but rather years before, when people barely thought much at all about networking or the Internet.

When everybody agrees that a company is terrible, odds are good that its stock has become undervalued. Similarly, when everybody agrees that a company's destined for greatness, its stock is most likely overpriced. If any of my stocks ever get to a point where everybody seems to agree that they're sure winners, that's when I'm slapping on a tight stop-loss order.

Have confidence, but be cautious
Now, just because I happen to like it when people bad-mouth my stocks, that doesn't mean I always turn a blind eye toward their arguments. As I have discussed before, professional shorts are often the first to realize that the emperor is, in fact, buck-naked. So while I might not agree with the conclusions, I'm always willing to at least listen to the arguments.

Above all else, always avoid the "well, I'll show you" instinct that some investors seem to adopt -- the attitude that ignores the facts and good old common sense simply because ego won't allow you to sell at a loss. The market doesn't know you, doesn't care about you, and isn't out to "get" you. If you forget that, the only thing you'll be showing to anybody is a record of your losses.

Bottom line
Remember, stocks are just ownership stakes in a business. They're not your children, they're not your sports team, and they're not your religion. If you've done your homework and have confidence in your analysis, who cares whether somebody else hates your stock?

The point is, though, that just because you don't like my stocks, that doesn't mean you're right and I'm wrong. Maybe the next time you see an analyst or columnist "bash" your little darlings, you can think of it in terms of being just one more person to be brought on board down the line at a (hopefully) higher price.

So to all of the haters and bashers out there, I say, "Do your worst." I've done my homework, and I'm more than happy to match wits and analysis against you in the market. After all, if we all agreed all of the time, there wouldn't be much of a market, and investing would be the domain of accountants, actuaries, and computer formulas.

By Stephen D. Simpson, CFA