Is it worth adding a well known stock in our portfolio, so that we can sail safely in the ocean of stock market? As per Benjamin graham sometimes, the stocks which are more familiar to us can turn out to be a dangerous investment.
“Psychologists led by Baruch Fischhoff of Carnegie Mellon University have documented a disturbing fact: becoming more familiar with a subject does not significantly reduce people’s tendency to exaggerate how much they actually know about it. That’s why “investing in what you know” can be so dangerous; the more you know going in, the less likely you are to probe a stock for weakness. This pernicious form of overconfidence is called ‘home bias’, or the habit of sticking to what is already familiar:
• Individual investors own three times more shares in their local phone company than in all other phone companies combined.
• The typical mutual fund owns stocks whose headquarters are close to the fund’s main office than the average U.S. companies.
• 401(k) investors keep between 25% and 30% of their retirement assets in the stock of their own company.
In short, familiarity breeds complacency. On the TV news, isn’t it always the neighbour or the best friend or the parent of the criminal who says in a shocked voice, “he was such a nice guy”? That’s because whenever we are too close to someone or something, we take our beliefs for granted, instead of questioning them as we do when we confront something more remote. The more familiar a stock is, the more likely it is to turn a defensive investor into a lazy one who thinks there’s no need to do any homework. Don’t let that happen to you.—“The Intelligent Investor”
“Psychologists led by Baruch Fischhoff of Carnegie Mellon University have documented a disturbing fact: becoming more familiar with a subject does not significantly reduce people’s tendency to exaggerate how much they actually know about it. That’s why “investing in what you know” can be so dangerous; the more you know going in, the less likely you are to probe a stock for weakness. This pernicious form of overconfidence is called ‘home bias’, or the habit of sticking to what is already familiar:
• Individual investors own three times more shares in their local phone company than in all other phone companies combined.
• The typical mutual fund owns stocks whose headquarters are close to the fund’s main office than the average U.S. companies.
• 401(k) investors keep between 25% and 30% of their retirement assets in the stock of their own company.
In short, familiarity breeds complacency. On the TV news, isn’t it always the neighbour or the best friend or the parent of the criminal who says in a shocked voice, “he was such a nice guy”? That’s because whenever we are too close to someone or something, we take our beliefs for granted, instead of questioning them as we do when we confront something more remote. The more familiar a stock is, the more likely it is to turn a defensive investor into a lazy one who thinks there’s no need to do any homework. Don’t let that happen to you.—“The Intelligent Investor”
