The Biased Investor (Part 7)

The Biased Investor (Part 7)

Does familiarity breed contempt?

Source: Public Domain

Some people love novelty. Others want to go with what they know. When it comes to money, evidence shows that people overwhelmingly prefer things they are familiar with to what they don’t know very well.

“This isn’t just a human factor. I discussed before how a researcher played musical tones around fertile chicken eggs, and found that when the chicks hatched they preferred the sounds they had been exposed to while in their eggs. He coined the phrase, “preferences need no inferences.” We don’t need to think about something to like or dislike it.”

This can show up in our investment portfolios. The “home country bias” is well-documented: investors tend to overweight companies that are based in their own nation. French investors have more French companies, Spanish investors own more Spanish firms, Japanese investors favor Japanese firms. But the familiarity affect holds true regionally as well. In the US, northeastern investors favor financial firms, Midwestern investors overweight industrial stocks, West Coast investors own more tech firms, and so on.

Source: JP Morgan

What should investors do? First, recognize your bias. Having a headquarters near your home doesn’t necessarily mean you know a company better. AIG is based in New York City, but the operations that caused it to collapse in 2008 were located in London. Second, US investors need to be especially careful right now that they don’t exclude the rest of the world from their portfolios. For the past several years, the US stock market has been the strongest in the world. But nothing stays the same. Outperformance leads to overpricing and subsequent underperformance. What goes around comes around.

Source: Bloomberg, Global Financial Data

Just because you’re familiar with something doesn’t necessarily make it a good investment. And past returns don’t predict future returns.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2017-07-17T12:21:55+00:00 June 9th, 2016|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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