Should You Love Your Investments?
Posted on 06. Dec, 2010 by TheFreeInvestor in Investing Philosophy
Often we hear from investment professionals that we should be emotionally detached from our investments. If you are a short term investor or a day trader, I guess, that principle makes sense. Though I understand the point that emotional attachment leads to irrational decisions (or delayed decisions), I have a different take on the subject. I invest in companies and businesses, not simply in pieces of paper for a quick overnight profit. So, I think it is better to be excited and attached to the businesses you own.
There, I said it !
Now, let me explain. Let’s assume that you are the sole owner of a business. It generates good cashflow and profit for you every year. Are you going to be detached from the business just because at some point in future you might want to sell the business? Of course not. It is your business ! So, I am assuming you will be passionate about it. The more passionate you are about the business, the more diligent you will be in researching every aspect of the business, e.g., what are the competitors doing, how your strategy gives you an edge over competition, what roadblocks are showing up in the horizon and what are the key drivers of the business etc.
Same principle applies to investing in a stock if you are investing for long term. If you are passionate about the business and industry, your research about the stock is likely to be diligent. You will enjoy the process of understanding every aspect of the business just like an entrepreneur. In his book One Up on Wall Street, super-investor Peter Lynch talked about investing in businesses that you know and use everyday, e.g., apparel chains, restaurant chains and consumer electronics etc. I am taking it a step further – as an independent investor, in addition to investing in businesses you see and use everyday, if you invest in businesses that you are love, you will have a better motivation to research the investment opportunity in detail and keep track of the business prospect after you have invested in the company.
At the same time, we need to keep in mind that diversification is one of the most important principles of building a prudent portfolio. So, by just focusing on companies whose products and services you use and like might not be enough to build a diversified portfolio. But, for the portion of your portfolio that is dedicated to businesses you are passionate about, it is an advantage that you are in love with your investments. It will help you become a better investor by doing more research and knowing more about the companies you own.
So, what do the pundits mean when they tell us not to fall in love with our investments? Well, we should be careful about being biased and too optimistic about stocks that have gone up in price since purchase of the stock and vice versa. Instinctively, it sooths us to see paper gains and pains us to see paper losses. We should consciously watch out against being irrational based on stock price movement of the stocks we own.
But, as far as, loving the businesses itself goes, I would say — go right ahead and keep tracking your investments passionately !
[Note: Photo on top is courtesy Kjunstorm]
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