Why Investors Get Fooled by Stocks like Tesla, Apple -- and Twitter

NEW YORK (MainStreet) — Did you buy Tesla a month ago at $190? Apple a year ago at $580? Groupon two years ago at $26? Don't beat yourself up; you can't help it. It's human nature.

Brad M. Barber, professor of finance at UC Davis and the Terrance Odean professor of finance at Berkeley, have studied the trading habits of thousands of investors and find most of us suffer from limited attention, overconfidence and, let's just say, bad timing.

The professors say the reason so many investors buy stocks when they are at their price peak is because that's when we pay attention. The media touts high-flying investments and most of us tend to buy, rather than sell, when those stocks are in the news.

"This attention-based buying can lead investors to trade too speculatively and has the potential to influence the pricing of stocks," write Barber and Odean in their research piece 'The Behavior of Individual Investors.' "Investors face a huge search problem when choosing stocks to buy. Rather than searching systematically, many investors may consider only stocks that first catch their attention (e.g., stocks that are in the news or stocks with large price moves). This will lead individual investors to buy attention-grabbing stocks heavily."

So you may buy Twitter at $45 on the day of its IPO's beginning value of $26, rather than waiting to buy on later, nearly inevitable, price weakness.

Barber and Odean note additional research that indicates that individual investors are more likely to trade a stock when a company's earnings announcement was covered in the investor's local newspaper.

But to make matters worse, many investors sell at the wrong time, as well.

"Individual investors have a strong preference for selling stocks that have increased in value since bought (winners) relative to stocks that have decreased in value since bought (losers)," Barber and Odean write.

Back to Top