“You don’t understand,” said a young lady, eyes glowing, “This isn’t a company…it’s a lifestyle.”

Many others echoed her sentiments, as a member of Whitman’s student run Investment Club pitched to “buy” $10,000 worth of stock in the clothing company Lululemon last Wednesday. Little analysis was given, but much love regarding the company was espoused.

The club ultimately voted to buy.

Tons of questions swirled around in my head, but most extended beyond the popularity of the company and their products. This reflected the trend of investing purely based off of emotions.

Now in all honesty, qualitative questions are easy, fun and interesting to ask. Everyone cares about basic things like how soft the products are or how much the company can charge before customers say no. The same can be said for inquiring about the cool factor or celebrity endorsements. But at the end of the day, these questions alone mean nothing.

For example, let’s look at something more popular. Twitter, which is expected to have its initial public offering in early November, drives home the importance of due diligence. Under S-1 filings with the U.S. Securities and Exchange Commission, the six-year-old company posted a loss of $69 million.

Banks and analysts estimate that the company will be worth anywhere from $10-15 billion after the IPO. This assessment is due to the company’s massive number of active users and its potential to monetize them. Even so, many will invest in the social media platform simply because of its name-brand power as Twitter.

Maybe Twitter has staying power, but in trying to make a profit, what happens if or when it has fallen out of favor?

Investing from a purely emotional standpoint is a quick pathway to financial ruin. The unfortunate thing is that it can affect an investor on many different levels. The process before buying, during buying and after buying or selling are all affected by biases.

Think about two companies — McDonald’s and Chipotle. Say for whatever reason you just like McDonald’s better. You feel that McDonald’s has much more menu variety and tastier food. As a result you choose to buy McDonald’s stock rather than Chipotle for this reason alone.

If you take a trip to the not so distant past, you’ll find on Feb. 20, 2009, the closing price of stocks for McDonald’s and Chipotle were $57.57 and $55.50, respectively. Now McDonald’s latest closing price was $94.78 while Chipotle’s was $527.50. Both would have made you money, but Chipotle to a much greater extent. Because in this instance you made a decision about an investment purely on the basis of something qualitative like food preferences, you missed out on a gain of several hundred dollars.

Selling stocks on emotion can work the same way. A lot of people bought Facebook because it was, well, Facebook. No need to think about how the company made or would make money, its popularity fueled everything. Then when cracks started to show, investors immediately sold off. If you bought the stock at $45 and sold early on at $17.50 (one of the lowest points it reached), then you would be missing out: The stock is now trading more than $50.

It is important to extend beyond subjective questions by checking things such as the financial health of the company, the price relative to their competition and major risk factors.

I make no suggestions on what to buy. Instead I simply ask that you do your homework. It’s okay to love a company, you just don’t have to be financially committed.

Fran Walker is a senior finance and accounting major. Her column appears weekly. She can be reached at fwalke01@syr.edu.

Published on October 28, 2013 at 1:05 am