Don't Fall in Love...

by Scuttlebutt Investor

...with a stock.  Women (or men) make much better bedfellows.  Falling in love hinders your ability to be objective when evaluating an investment.  We often tend to fall in love with companies that make products we buy or use.  

Peter Lynch (brilliant investor) is famous for coining the investment philosophy "Invest in what you know".  There is merit to making investments in companies or products that you know or use in your everyday lives.  We are more likely to understand these companies and their competitive advantages because we are consumers of their products.  Warren Buffett has a similar investing philosophy which he refers to as "Circle of Competence".  He recommends staying within the bounds of companies and industries that you understand when it comes to investing.  However, I don't believe that this philosophy works in isolation.  There is another side to the coin, which is valuation.

The problem is that companies we love are also often companies that other people love and the fact that so many people love them typically drives the stock price up. Sometimes this elevated stock price for a loved company is justified, sometimes it is not.  It depends on whether or not the thing that makes the companies so lovable (I call this the competitive advantage) is durable (can last for a long time).  The issue, however, is that investors often fall so deep in love with a company that they forget the other side of the coin.  Love clouds judgement (when it comes to stocks as well as people!).       

Despite being well aware of this Love Bias as I call it, I have fallen victim to it at times.  Companies like Disney (DIS), Apple (AAPL), Google (GOOG) and Nike (NKE) are companies that are broadly loved by consumers.  That doesn't mean that they are necessarily overpriced.  They are amazing companies that make amazing products and a higher valuation may be justified.  My point is that a disciplined value investor needs to do the work to determine if a loved company is reasonably priced.  They shouldn't merely buy it because they love their products or services.  

Happy Valentines Day!