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I'm often asked how I know which companies to avoid – like the plague – or "sell short" in the name of big profits.
"You seem to have it down to a science," said Barbara P. and her husband, Robert, over coffee in Seattle recently…
Fitbit Inc. (NYSE: FIT) at $16.97 before it fell 71.66%…
Sears Holding Corp. (Nasdaq: SHLD) at $144.86 before it fell 98.4%…
GoPro Inc. (Nasdaq: GPRO) at $86.97 before it fell 94.5%…
They'd come to check out the original Starbucks Corp. (Nasdaq: SBUX) location in Pike Place Market after hearing me talk, during an appearance on "Varney & Co." a week ago, about why I think the company is in for some rough sledding in the months ahead.
"Science may be pushing it, but thank you for the compliment," I said… and I added that "the real secret is psychology."
Let me explain…
Logic Doesn't Apply When Emotion Takes Over
Market psychology is the feeling investors develop that compels them to buy or sell specific stocks. It's very different than technical knowledge or even a hot tip.
What I'm talking about is the emotional driver that prompts 'em to buy or sell. The former is usually an expression of optimism, while the latter is usually a reflection of inner fear. Either way, logic goes right out the window.
The key to big profits when this happens is finding companies where the two – logic and emotion – are at odds.
Take Eastman Kodak Co. (NYSE: KODK), for example.
The company is an unmitigated disaster and has been for decades because it missed the transition to digital photography despite the fact that it created much of the technology driving it today.
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Not many people know, for example, that Kodak actually invented the first megapixel camera in 1986. That should have given them a huge lead because they were years ahead of the competition, but it didn't because executives failed to grasp the earth-shattering potential.
Here's another surprise… Kodak actually spent more than half a billion dollars in the mid-90s to develop the first digital preview cameras yet held back because management feared that releasing that technology would eat into the film business.
Other critical failures followed, including the misguided purchase of Sterling Drug in 1988 and a series of CEOs who just couldn't grasp the inevitability of digital images, much in the way former Microsoft CEO, Steve Ballmer, failed to understand Apple's iPhone when the late Steve Jobs unveiled it. (Which he ridiculed in this now famous clip from 2007.)
Kodak even purchased a photo-sharing site called Ofoto in 2001. That should have been an amazingly profitable springboard that allowed them to dominate today's social media a la Instagram or Twitter!
If you're like most investors, you're asking yourself… Ofoto???!!!!
My point… exactly.
Kodak has repeatedly made some really intelligent breakthroughs over the years only to shoot themselves in the proverbial foot every time.
Sales have fallen from $10.3 billion in 2007 to only $1.53 billion a decade later to 2017. Net income, over that same time frame, has dropped from $676 million to a staggering $94 million – a loss of 86.09% in a decade.
The company's stock has fallen by more than 60.1% in the past 12 months alone and a jaw-dropping 80.7% over the past five years during one of the biggest bull markets on record.
I think it'll hit zero in the next six months.
Psychology Is Your Key to Big Profits Ahead
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean, and he's also the founding editor of Straight Line Profits, a service devoted to revealing the "dark side" of Wall Street... In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.