Buy and Hold Stock Investing: Watch Out for Price Bias
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One of the issues that faces stock investors is overcoming price bias. CNN Money points this out about price bias, and how we are influenced by it:
This is a mistake investors make all the time. That’s because every day we’re bombarded with stock prices, yet no one publishes a ticker tape of business values. Behavioral-finance experts have a term for this: availability bias. We place more weight on prices than we rationally should simply because this type of data is more available than others.
This focus on price can be a problem, especially when it distracts us from value. The business value of a company is often a more important consideration when choosing investments than the current price of stocks. Instead of looking at the stock price first, consider the following aspects of the business:
- Profit margins
- Earnings
- Competence of management
- Underlying business model
- Potential for growth
- Competitive advantages
- Average company performance, rather than focus on extremely bad or extremely good periods
There is, of course, no full-proof way to choose stocks. However, you can get a better idea of the staying power of a company by looking at its business value before you look at its stock price. This way, you can learn about the kind of company it is, and whether or not it is likely to continue to do well — or if its current performance is a fluke. Understanding the underlying fundamentals of a company can help you get a better feel for whether or not the investment really is a good value.
If you plan to hold on to the stock for a while, this becomes especially important. You need to beware of price bias even during the down times. If it appears as though a stock is tanking along with a broader down cycle, but the underlying fundamentals are still good, you might consider holding on and riding out the down market. Chances are, if nothing has changed about the fundamentals, the stock will bounce back.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.
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