Financially Speaking Podcast

Yogurt, Apples and Banana Splits

Published on May 10, 2013

 

The first TCBY Yogurt store I ever saw was in a shopping center on Rodney Parham Road in Little Rock.  It was on my way home after work and can remember the line of customers flowing out the front door and down the sidewalk.  “What a killer business!” I thought.  Eventually TCBY stock became publicly traded and everyone was getting on the stock of the century.  After all, the stuff tasted real good and look at all those lines in front of all those stores!  And TCBY was building more and more stores.

The stock began trading in the 1984 and rose almost 600% in 1985.  In 1986, the stock soared to almost $60; and then plummets to about $35, then eventually lower until the company sold.  The stock no longer trades and the store is now a Chinese restaurant in the shopping center. 

Investors make poor investment decisions based on how they feel about companies.  It is investing with the heart and not with the head.

For example, what is not to like about Apple?  It has a great reputation.  The company makes magic that you can hold in your hands.  After a visit to the Apple Store, you might think that your 401(k) account should own a slug of Apple stock.  Someone is buying the stock.  Ten years ago, investors paid $8.98 for the stock.  Last September investors paid $667 for the stock.   The stock price looked like the left side of a fully-loaded yogurt banana split.  Now trading at $451. It looks like the right side of the banana split.  September investors have lost over 32%.

Here is another example:  Greece.  For the past few years, investors fled Greece like it had the plague.  Until a few months ago, the Greek financial markets looked like the right side of the banana split, melting quickly.  Who in their right mind would buy Greek stocks or bonds?  All that bad news you have to predict that the entire country would fall into the Aegean Sea.  Well last year Greece’s major stock market index was up over 33%, making it the best performing market in the European Union.  Who would have thought?

Why do investors keep making these bad investment decisions?  We can’t help it.  It is called, by behavioral economists, the herd mentality.  We get caught up in everyone else is doing and do what they do.  It is hard to fight the emotions of herd mentality and most of us can’t do it alone.  We need an independent, trusted advisor to fight past the emotions of the moment and to make informed, logical investment decisions.

You can still eat a low-fat yogurt banana split at the TCBY on Markham Street while looking at your magical Apple iPad.  It’s sometimes best to just buy the products of these wonderful companies; and leave the stock alone.  

Tags: herd mentality; investment decisions making

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