There is a natural tendency for people to invest their money in companies with which they are familiar. Human beings draw comfort, security and give credibility to things with which they are familiar. It is something known as familiarity bias, and the problem is, without people realizing it, the bias puts dangerous blinders on investors.
This applies to companies we see delivering packages every day in our neighborhood, companies with locations in every town, who sponsor all the sporting events and TV shows we watch every night, and the companies whose clothes we wear every day. It can even apply to companies we have worked with for a very long time. Since we see these companies every day, we can easily become seduced into believing we really know a lot about the companies we invest in, when in fact we know next to nothing.
Ask yourself, among the companies you have ever invested in, have you ever met the company’s CEO or CFO? Have they ever shared with you what their plans are for the company? How about the board of directors, do you know who they are and what their qualifications are to sit on that board? Do you know their Director of Research and Development? Do you have any idea about the new products they are working on? Have you ever met the Director of Marketing and have they shared with you the advertising campaigns they are considering? Is their strategy on the verge of offending half their customer base?
The answer to these questions, for most investors, is no. Investors who take comfort from investing in companies they believe they know, are at the mercy of forces they are powerless against.
So, what is it that investors are ultimately investing in? It is a brand they identify with and certain principles and values they merely perceive the brand embodies. At best, they have an image or illusion in their heads that’s driving their investing decisions, nothing scientific. Investing through this or any other bias, leaves blind spots that do not allow investors to see if they are making good or disastrous decisions. The bias does not allow investors to see that everything they and everyone else already know and believe about the companies they are investing in, is already factored into the current price of stocks. It is only unknowable and unpredictable news and information that will move the price of stocks, and when they make investing decisions in that way they are gambling and speculating, not investing.