DJIA 7678.87 +139.80 (+1.85%) S&P 500 974.77 +17.24 (+1.80%) Nasdaq 1523.31 +33.06 (+2.21%) Value Line ndx 748.96 +7.21 (+0.97%) 30-Year Bond 102 16/32 -1 5.33% Yield
Lunchtime News | |
Related Items | |
|
FOOL PLATE SPECIAL
An Investment Opinion
by Alex Schay
Loss Averse
Yesterday, as every slight uptick seemed to goad new sellers into action, an interesting phenomenon began to manifest itself in the market -- the prospect that losses will always loom larger than gains. This is one of the key findings of two Israeli psychologists that did pioneering work in the late '70s in the area of managing risk and uncertainty, they called their work "Prospect Theory." The asymmetry between the way humans make decisions involving gains and the way they make decisions when losses are involved is one of the more eye-opening conclusions that the pair came to, and has since been supported in research done across a wide range of disciplines. It also has important implications for investors poised to click their mouse on that sell order.
Daniel Kahneman and Amos Tversky, in their first paper published in 1979, describe a series of experiments where they first ask subjects to choose between an 80% chance of winning $4000 and a 20% chance of winning nothing, versus a 100% chance of getting $3000. The results were not too surprising, 80% of the subjects chose the certain outcome. Then they asked subjects to choose between taking the risk of an 80% chance of losing $4000, and a 20% chance of breaking even, versus a 100% chance of losing $3000. In this case 92% of the respondents chose to take the gamble. After multiple iterations of the experiment across a comprehensive range of scenarios, the conclusion that Kahneman and Tversky reached was that when the choices involved losses, we become risk seekers. We are not necessarily risk averse, but rather loss averse. Tversky offered his opinion as to why that might be:
"Probably the most significant and pervasive characteristic of the human pleasure machine is that people are much more sensitive to negative than to positive stimuli.... Think about how well you feel today, and then try to imagine how much better you could feel.... There are a few things that would make you feel better, but the number of things that would make you feel worse is unbounded."
(from Against the Gods: The Remarkable Story of Risk by Peter Bernstein )
So how has this behavior manifested itself in recent days? Money managers would prefer to sit on the sidelines until they can feel-out a bottom, and then jump back in. The amazing returns over the last couple years have made investors very cautious. Ironically, when the market gets crushed like yesterday, the mental calculation isn't, "How much has the stock gone up since we've bought it?" but "How much we could have gotten if we had sold it at its peak five weeks ago." This attitude leads to a kind of panic when the prospect of realizing a smaller and smaller percentage of the peak return begins to play out in a short period of time. Wild swings on the margin of total returns are almost always ruled by emotion. Being anchored by a company's particular business prospects should allow the investor to avoid the distractions brought on by valuations that diverge violently from intrinsic value, both on the upside and on the downside.
Boeing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %> advanced $2 1/16 to $33 after announcing plans to buy back up to 15%, or roughly 145.9 million shares, of the company's stock to "enhance shareholder value." The aerospace and aircraft company also announced it has named Senior Vice President Alan Mulally, formerly president of the Information, Space & Defense Systems unit, to replace Ron Woodard as president of the company's Commercial Airplane Group, which has had "unsatisfactory financial performance."
Diversified agribusiness and biotechnology firm Mycogen Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MYCO)") else Response.Write("(Nasdaq: MYCO)") end if %> surged $7 7/16 to $27 7/16 after Dow Chemical Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DOW)") else Response.Write("(NYSE: DOW)") end if %> announced that it will acquire through a tender offer the roughly 32% of Mycogen that it doesn't already own for $28 a share -- a 40% premium to Mycogen's $20 closing price yesterday.
Big Blue computing powerhouse IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> rose $2 1/8 to 114 3/4 on reports that the company has quietly put its Global Network operations on the auction block and could sell it for as much as $3 billion to $4 billion. IBM has hired Merrill Lynch to do the honors.
Some drug companies bounced back this morning after dropping yesterday on little apparent news. Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> added $1 5/8 to $94 5/8, Warner-Lambert (NSYE: WLA) picked up $1 to $66 1/4, Eli Lilly <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLY)") else Response.Write("(NYSE: LLY)") end if %> rose $1 3/4 to $67 1/2, Merck <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %> advanced $3 9/16 to $119 1/2, Bristol-Myers Squibb <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BMY)") else Response.Write("(NYSE: BMY)") end if %> was lifted $4 1/8 to $102, and Glaxo Wellcome <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLX)") else Response.Write("(NYSE: GLX)") end if %> gained $3 1/2 to $58 7/8.
Computer retailer and reseller CompUSA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPU)") else Response.Write("(NYSE: CPU)") end if %> added $1/4 to $12 after announcing it has completed its acquisition of Tandy's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TAN)") else Response.Write("(NYSE: TAN)") end if %> Computer City subsidiary for $136 million, down from the originally announced price of $275 million due to a decline in Computer City's book value. CompUSA plans to close 50 of the 101 Computer City stores after it liquidates the inventory and change the name of the remaining stores to CompUSA.
Oil and gas exploration and production giant Royal Dutch Petroleum <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RD)") else Response.Write("(NYSE: RD)") end if %> picked up another $4 3/16 to $44 3/16 and Royal Dutch/Shell Group sibling Shell Transport & Trading <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SC)") else Response.Write("(NYSE: SC)") end if %> added another $2 7/16 to $33 5/8 on market rumors that the companies may merge with Texaco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TX)") else Response.Write("(NYSE: TX)") end if %>, which rose $1 to $56 9/16.
Haagen-Dazs parent Diageo PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DEO)") else Response.Write("(NYSE: DEO)") end if %> jumped $4 3/16 to $42 after The Wall Street Journal reported that rival Ben & Jerry's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BJICA)") else Response.Write("(Nasdaq: BJICA)") end if %> has ended its 12-year distribution agreement with Dreyer's Grand Ice Cream <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DRYR)") else Response.Write("(Nasdaq: DRYR)") end if %> and has teamed up with Diageo to deliver its products. Vermont-based Ben & Jerry's, which gained $1/8 to $15 1/2, decided to make the break on concern that it was losing its independence in the wake of an unwanted takeover bid from Dreyer's in February.
Integrated circuit manufacturer Integrated Circuit Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICST)") else Response.Write("(Nasdaq: ICST)") end if %> soared $1 15/32 to $7 31/32 after announcing it expects fiscal first quarter earnings will be "well within the range of current analysts' consensus mean estimates" despite the economic downturn in Asia. The company said it has experienced significant recovery in its bookings and backlog this quarter compared with the last six months.
Electronic signal processing components supplier Sawtek Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SAWS)") else Response.Write("(Nasdaq: SAWS)") end if %> moved up $1 5/8 to $11 7/8 after announcing it intends to repurchase up to 1 million shares because it believes its stock is currently undervalued by the market.
Health insurer Aetna Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AET)") else Response.Write("(NYSE: AET)") end if %> added $2 1/16 to $62 1/4 after announcing it plans to withdraw from the Medicare health maintenance organization business in six states to cut costs. The company will exit the business in Delaware, Maryland, Massachusetts, New Hampshire, Rhode Island, and Virginia, as well in the District of Columbia, Windham and Tolland counties in Connecticut, Polk County in Florida, and Marin and Sonoma counties in California.
Data processing company Automatic Data Processing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AUD)") else Response.Write("(NYSE: AUD)") end if %> climbed $1 1/4 to $65 after Lehman Brothers raised its rating on the company to "buy" from "outperform" with a 12-month price target of $80. Lehman pointed out that 95% of the company's business is U.S.-based, with the rest in Europe, so there's no direct exposure to the economically challenged Asia.
Bank holding company InterWest Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IWBK)") else Response.Write("(Nasdaq: IWBK)") end if %> tacked on $1 to $24 1/4 after announcing it will buy back up to 230,000, or 1.5%, of its shares outstanding.
Online book and music retailer Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> dropped $6 9/16 to $77 after Merrill Lynch started coverage of the company with a near-term "reduce" rating and a long-term "neutral" rating. The less-than-ringing endorsement also helped drag down other Internet-related stocks. America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> stumbled $3 7/16 to $78 1/26, USWeb <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USWB)") else Response.Write("(Nasdaq: USWB)") end if %> slipped $1 5/8 to $12 1/2, and Earthlink Network <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ELNK)") else Response.Write("(Nasdaq: ELNK)") end if %> sank $1 9/16 to $24 15/16.
Financial services giant Travelers Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %> voyaged $2 1/2 lower to $41 7/8 after saying its Salomon Smith Barney investment banking unit had pre-tax losses of $150 million in July and August due to "extreme volatility" in its U.S. and global arbitrage businesses, including some positions linked to Russia. Merger partner Citicorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> lost $4 7/8 to $103 7/16. Bankers Trust <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BT)") else Response.Write("(NYSE: BT)") end if %>, which said it has lost $350 million so far in fiscal Q3 due mostly to Russian positions, fell $4 7/16 to $69 7/8.
Vaccine developer Aviron <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVIR)") else Response.Write("(Nasdaq: AVIR)") end if %> was shot down $9 3/4 to $11 15/16 after the FDA refused to accept the company's regulatory filing for its FluMist inhalable influenza vaccine. The FDA said it needs more information about the manufacturing processes and facilities used to make the vaccine.
Freight hauler Roadway Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ROAD)") else Response.Write("(Nasdaq: ROAD)") end if %> broke down this morning, losing $3 9/16 to $11 9/16 after saying its fiscal Q3 earnings will be about 60% below last year's $0.50 per share, missing the First Call mean estimate of $0.40 per share. Revenues will be about 5% lower than last year's results, which were inflated by last summer's UPS strike. The company said it will cut costs by reducing its headquarters staff by 6% and freezing hiring in its field operations.
Real estate finance and mortgage servicing firm WMF Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WMFG)") else Response.Write("(Nasdaq: WMFG)") end if %> dropped $2 1/2 to $8 1/4 after saying a subsidiary was hit with a $30 million pre-tax loss after deciding to sell $691 million in commercial mortgage loans to a unit of Merrill Lynch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> and closing hedges on the loans. WMF had planned to sell the loans in a securitization transaction later this month, but decided to sell now due to "adverse securitization market conditions."
Internet software developer Inktomi Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INKT)") else Response.Write("(Nasdaq: INKT)") end if %> lost $2 1/4 to $46 3/4 as the company said it would buy privately held online comparison shopping software maker C2B Technologies for 1.8 million newly issued Inktomi shares.
Educational software developer The Learning Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLC)") else Response.Write("(NYSE: TLC)") end if %> was spanked $1 9/16 to $16 1/8 this morning. The company completed its merger with Broderbund Software last night and said today that it will launch a "Broderbund is Back" campaign, which emphasizes cutting costs and improving distribution at its new unit.
Air carrier Trans World Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TWA)") else Response.Write("(AMEX: TWA)") end if %> slipped $3/8 to $6 1/4 as its pilots agreed yesterday to a four-year labor contract that will reportedly boost their pay to 90% of the airline industry's average at contract's end from its current 60% level.
Satellite systems designer Loral Space & Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LOR)") else Response.Write("(NYSE: LOR)") end if %> fell $11/16 to $15 3/16 despite being rated "outperform" in new coverage by Morgan Stanley Dean Witter.
Casino games maker Paul-Son Gaming Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSON)") else Response.Write("(Nasdaq: PSON)") end if %> lost another $1 to $5 3/4 after reporting a fiscal Q4 loss of $0.34 a share yesterday, compared with earnings of less than $0.01 a share a year ago. The company also said it probably will not become profitable again until after Q1 of fiscal 1999.
Financial data processing systems developer Fiserv <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FISV)") else Response.Write("(Nasdaq: FISV)") end if %> dropped $1 3/4 to $37 1/4 after agreeing to buy the debit and credit card services unit of Deluxe Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DLX)") else Response.Write("(NYSE: DLX)") end if %> for unspecified terms.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
Click here for continually updated Portfolio Numbers.
ANOTHER FOOLISH THING
See something moving a stock that we didn't cover?
E-mail the Fool News Team
and we will start working on the story.
Unfortunately, we cannot answer every e-mail
or respond to individual questions.
|
Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
Editing |