Don’t Bank On Sentiment

The sentimental value means nothing to elite investors. They know all too well the dangers of investing based on sentiment. Personally, we have all had experiences where we let emotions cloud our judgment. I’m sure we can all think of one or two relationships in high school or college we regret.

Caught up in a moment, we often put more value on something than it’s really worth. How many times have you gone to a yard sale, and the owner is selling something at a price that makes you scratch your head?

You:  “$1,000 for a baseball?”

Owner:  “This is not just any baseball. I caught this ball in 1975 when I was 12. You know who hit it?”

You:  “No.” (shaking your head)

Owner:  “George Brett – when he was a rookie. Was his second home run.” (You’re thinking to yourself, big deal. The first home-run ball would be worth more).

You:  “Do you have any proof that it was hit by George Brett?”

Owner:  “It’s all in here (pointing to his head).”

You:  “Why $1,000?”

Owner:  “Because it was a special day for me. My dad pulled me out of school, and my dad loved the Royals! He’d roll in his grave if he knew I was trying to sell this ball.”

That baseball may have sentimental value to the owner, but it has no market value whatsoever. An old baseball with no autograph or distinguishing features is probably worth a quarter. The market value of a baseball with Brett’s autograph along with a picture of the owner as a kid with George Brett verifying the story would be worth more than a quarter on the market.

In investing, prices are often driven by sentimental value and not market value – like the yard sale baseball. In other words, the price investors are willing to pay doesn’t match the underlying economic value.

I scratch my head every time a company’s stock shoots up after an earnings call, even though the company reported losing money.


That’s all investors need to hear. Never mind that the company lost $.53 per share. But experts were predicting a loss of $.60 per share, so the company outperformed. What?! That doesn’t justify the stock shooting up to $5 per share.

I recently revisited an article from The Street at the end of 2019 that read Market Sentiment And Valuation Are On Thin Ice,” where the author warned of an impending market correction because the market was in overvaluation territory.

The S&P 500 P/E ratio at the time was 18.9 (the historical average is 16). Fast forward to today, where the S&P 500 P/E ratio is currently trading around 40, near the same levels at the height of the dot-com bubble. Based on these numbers, the stock market is clearly trading on sentiment as prices don’t reflect underlying economic reality.

Savvy investors don’t bank on sentiment. They don’t let their own emotions or the collective emotions of the investing public cloud their judgment. You may have grown up a Philadelphia Eagles fan but betting that they beat the Chiefs next year in their 2021 season matchup would be unwise.

The sentiment is why savvy investors are drawn to hard assets that follow more predictable fact-based valuation metrics than emotion-fueled investments. It’s hard to evaluate an investment’s potential success and make reliable financial projections when an element such as investor sentiment can throw everything into chaos.

With young, inexperienced investors running rampant on free-trading platform Robinhood and treating the stock market like their personal playground (Exhibit 1:  wallstreetbets Redditors and Gamestop (GME) stock), the sentiment is fueling investing decisions like never before. Elite investors are not taking the bait.

Illiquid, hard assets with long-term lockup periods and high entry fees lock the petulant children out of the store. This frees up elite investors to look at the pure merits of an investment:

  • What do the numbers, trends, demographics, economic indicators, and other metrics look like?
  • If I look at the proformas, what happens if this string gets pulled?
  • What’s the result of income and valuation?
  • The good news about long-term hard assets is that the strings that get pulled never have anything to do with emotions or sentiment. If rents go up, what happens to occupancy and long-term cash flow?

These are the questions savvy investors ask, not what the crowds think.

Don’t bank on sentiment by taking sentiment out of your investing equation. Look to private markets and assets with long lockup periods that prevent investors from acting on their impulses. Invest with an eye 3, 5, 7 years into the future and base your decisions on cold hard numbers.

Don’t band on sentiment, emotions, or impulses. They will betray you in most instances, just like the emotions that drove you to pay a million bucks for that Delorean because of the sentimental value of “Back to the Future”.

The underlying economic reality puts the market value of a mint Delorean at around $46K – a far cry from $1M. You may think that’s an extreme example, but with some stocks trading at a P/E ratio of more than 5,000, it’s no laughing matter.

Remove emotions from your investing approach, and you’ll avoid overpaying for an investment – ensuring a higher likelihood of a return on your investment.


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Logan Freeman

Building generational wealth with alternative investments