Zynga: Just Say 'No'

One evening two years ago, I logged in to Facebook (FB) to upload new photos of my son and I got an announcement that John had just planted corn on some videogame I'd never heard of.

Why anyone would have found that piece of information interesting was beyond my comprehension, but before I finished my upload, I had received no fewer than nine other status updates. James milked a cow. Irene made plum wine. Kate built a barn. And all of them were requesting that I join them on Farmville.

In the weeks that followed, I changed my Facebook settings multiple times to block the status updates, but they somehow found a way to keep coming. It was a losing battle. I finally succeeded in blocking FarmVille but then I started getting invites for CastleVille and CityVille. Susan just built a skyscraper. Great!

I defriended the worst offenders, changed my settings yet they just kept coming.

Long story short, I quit using Facebook altogether.

Emotion Blinds
I tell the story for a reason. My blind hatred of Zynga (ZNGA) -- creator of FarmVille et al -- and its games made trading the stock a bad idea. Yes, I missed a great short opportunity, but sitting this one out was the right thing to do. When you lose emotional control, you lose objectivity. And there is no faster way to ruin yourself in the capital markets.

Fear and greed drive markets, but don’t forget how powerful an emotion can be. When you're able to maintain emotional detachment -- embracing your 'inner Spock', if you will -- you can trade the emotional impulses of others in a contrarian strategy. But when you find yourself legitimately hating a stock as if it were an old enemy with whom you have a blood feud, you’re no longer thinking rationally. You’re not looking at the numbers and you’re setting yourself up for failure.

Stay Detached
Think about talented short sellers you've met, traders who have been in the business a long time. You will never hear them say things like, “I hate this stock” or “I want this to fall.” They keep a level head and stick to their trading rules. Or they don’t survive long in the business.

Emotional detachment is equally important on the long side, of course. I consider Peter Lynch’s advice to “buy what you know” to be some of the most dangerous advice ever given because it requires a level of emotional control that so very few people have. The fact that your neighborhood Starbucks (SBUX) is your favorite hangout doesn’t make a good or bad investment. But it can cause you to lose objectivity.

To be sure, an investor can learn a lot by visiting local stores. But you have to make a herculean mental effort to prevent anecdotal data from feeding a confirmation bias that essentially tells you what you want to hear. If you’re already a Starbucks bull, you might notice that the lines seem longer than usual but fail to notice that customers have traded down from venti size to tall, and vice versa for a Starbucks bear.

Sinners
Returning to the theme of hatred, we should also consider the peculiar case of sin stocks, particularly tobacco. I don’t know that there has ever been a more despised industry. But investors who hate tobacco for personal reasons or avoid it due to moral qualms create trading opportunities for the rest of us.

The historic tobacco stock underpricing has gone into reverse this year, and Big Tobacco giants like Altria (MO) and Philip Morris (PM) are among the best performing. Whether this is simply a temporary phenomenon created by the current low interest rate environment remains to be seen, but the behavior of sin stocks is still something that every investor should study (see “The Price of Sin“).

Finally, a confession: after going on about the need for emotional control, I still hate FarmVille. Just writing the word brings a sneer to my face and causes my heart rate to rise.

I have no business trading Zynga stock.

Disclosures: Sizemore Capital is long MO.