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Be Careful Buying the Name

Be Careful Buying the Name

May 8, 2018 | Financial Concepts

People purchase goods and services from companies they like and continue to make repeat purchases from the same companies. This makes sense as we are, of course, creatures of habit. Our brand loyalty is on display every time we step into a grocery store, shopping center, or log onto an online retailer. We tend to purchase the same brand of paper towel or saltine crackers if for no other reason than it’s what we have always done. When purchasing everyday items, there is nothing wrong with frequenting the same merchants and haberdasheries. We gain confidence in their service and get to know the quality and construction of their products.  

The problem lies with people using that same logic when purchasing stock in companies. I love Under Armour’s golf clothing, so why wouldn’t I purchase their stock? I ship all of my packages with UPS and always receive great customer service, so clearly purchasing their stock would be a great investment for my retirement account. As crazy as these two statements seem, it is the determining factor in far too many misinformed investment decisions. Determining the correct stock to purchase for your investment account should be based on the fundamentals of the company, an in-depth review of their balance sheet and income statement, an intimate knowledge of their growth potential and competitors as well as many other factors. The end product that is produced or service provided gives us absolutely no information on the current financial state of the company or their P/E ratio.

It is also a mistake to purchase companies due to geography. It is all too common for investors to feel like they know a company because it is headquartered in their hometown, know someone who works there, or is potentially their employer.  We call this “familiarity bias”. We can convince ourselves that we have more knowledge about the company or their growth potential simply because we drive by their office every day and see a lot of cars in their parking lot.  

Investing in individual stocks involves risk, and, in some cases, large amounts of risk. If you are planning to use individual stocks as the main facet of your investment strategy, be very careful to center your decisions around sound research and not flawed biases.  Or, better yet in our opinion, use diversified investments with the assistance of trained professionals. For a more in-depth conversation about this topic, check out our recent podcast, “My Stock is Better Than Your Stock”.

Nate Condon

Walkner Condon Financial Advisors

Walkner Condon Financial Advisors is a registered investment advisor with the SEC and the opinions expressed by Walkner Condon Financial Advisors and its advisors in this piece are their own. Registration with the SEC does not imply a certain level of skill or training. All statements and opinions expressed are based upon information considered reliable although it should not be relied upon as such. Any statements or opinions are subject to change without notice.

Information presented in this piece is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed.

Information in this piece does not take into account your specific situation or objectives and is not intended as recommendations appropriate for any individual. Readers are encouraged to seek advice from a qualified tax, legal, or investment adviser to determine whether any information presented may be suitable for their specific situation. Past performance is not indicative of future performance.