Monday, 28 March 2011

Familiarity


I read an investment article recently that suggested investors are taking the buy-local movement a little too much too heart, with the typical household having about 30% of its portfolio invested in shares head-quartered locally.

Many investors believe that local knowledge gives them an edge when it comes to investing, but data proves them wrong. A recent study found that investors with a local bias tend not to come out ahead, even when betting on small companies that aren't widely followed by analysts. Apparently, investors too often confuse "something familiar with something safe".
Another parallel between business and sports investing, at least for me. As I wrote not too long ago, one of the hardest things for me when I'm trading a game is to trade a game with a completely open mind. While I should base decisions solely on what is taking place in front of me, it's very hard to - for example - erase the memory of the game last week when one of the teams collapsed, or had a stunning comeback, or whatever. Trading is not a time to embrace the warm, fuzzy feelings you may have about a team or a player, however much you made from them in previous contests.

Something familiar is not to be confused with something safe when it comes to money, although arguably, it's a different matter when it comes to sex. I'm pretty sure it was Mark Twain who said "Familiarity breeds contempt - and children".

4 comments:

Chris said...

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Mark said...

Hi Cassini

What you are suggesting is very counterintuitive in that you would expect people who are familiar with a business to know more than people who are not as familiar.

I suppose that within the group there are bound to be people who know will have real knowledge that gives them an inside edge whereas others will invest because they know the name of the company.

I suppose that the parallel to the above with regards to horse racing for example would be punters with real inside knowledge that gives them a real edge and others who know someone that knows someone that drinks in the same pub as a stable hand, if you see what I mean.

Thanks for another thought provoking article
Mark

Robin said...

Hi Cassini

Just wondering if you had seen the Chievo v Sampdoria draw price for the game scheduled this Sunday?

Have read your comments on these before.

Thanks

Robin

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