The Stock That I Just Bought Is Always The Best One

Kathy

I was shopping for a new pair of running shoes at Changi City Point the other day. Frankly I was looking for something that is hovering just above $100 or better still below that.

I scoured the rows of shelvings and eventually found 2 of the models that met both my budget and in terms of design preferences. The sales staff asked for my shoe size and went to the back of the room to look for them. He returned shortly with a worried expression and apologetically told me that the 2 models did not have my size and recommended another model that was much higher that what I was ready to spend and the design was not what I usually would go for. The sales person told me that the Nike Zoom technology had a great cushioning system designed for agility and has a lower risk of injury and that it was more value for money than the other two models I initially shortlisted.

I wasn’t exactly in love with the recommendation but didn’t exactly want to put off too long to buy a new pair of shoes as my current one already has a loose sole. I bought it nonetheless.

3 weeks out, I have been wearing it for a couple of times. It felt exactly like what the salesperson told me. The support was totally on a different level as compared to the previous ones I have worn. I also started to observe what other serious runners are wearing and see if most of them do wear the models with better cushioning. I like what I saw. I started to be pleased with the purchase. And the longer I look at them, the more the design appeals to me. I started constructing new narratives in my head that never existed before.

Me and my new running shoes at Lower Peirce Reservoir Park

“This pair of running shoes that I got feels really way better than the other 2 models that didn’t have my size. Those 2 models would not have been as good for my feet anyway. The designs which I used to like in hindsight, were in fact a little mainstream which I now realize. Being value for money is not simply just about having a pair of shoes that can do the simple job. It is about buying one that minimizes the risk of injury and provides better comfort to the feet.”

The takeaway is that once we make a decision, it is only natural that we immediately start to look for all of the reasons why we were right to do so. We started to tell ourselves that there was something nice about the designs that we previously did not notice. That it was important to reduce risk of injury with shoes that have better support. (Which I never bothered in the past anyway) Whatever the exact reasons we construct, the general principle remains: we are not looking for truth, but we are seeking comfort that matches our decision. This is so that we can maintain our ego and happiness. (I might be right after all that these new shoes are better in quality but the point is that I will want to think that I am correct now) Another common analogy we see would be people breaking up with their “ex”, which they didn’t really like anyway.

In the same vein, when we are invested in a certain stock, it is no surprise to continuously seek out positive evidence that supports an investment thesis and avoid or scoff at articles that say otherwise. An investor must not have such biases. At the very basic level, it is still about studying the fundamentals of the companies where your conviction should come from. Do not selectively read or “unread” the positive or negative developments of a stock just because you bought or sold it. Detach your evaluation of the future prospects of a stock from the previous decision that you already have made in order to be as partial as you can be. This is a simple way to remain objective. But in practice it is not easy for sure. Just like I wouldn’t be able to tell myself that the more expensive shoes I bought are not materially any different than the cheaper ones I used to have. (Which frankly I did tell myself so in the past to justify why I bought shoes under $100)

Hence as much as we can as an investor, to be aware and be mindful of how such “endowment effect” lives somewhere so deep within us and plays an invisible part in our investing decision process. We will tend to overvalue what we own and undervalue what we don’t. Do not try to use after-thought logic to rationalize your decisions made. But rather you have to first define to yourself what constitutes a quality purchase of any given stock and if you really did follow through that process when buying it. And after doing so, be your own “devil’s advocate” to challenge what you decided months ago to see if there were any blindspots that were previously seen.

About Kathy

Co-Founder of The Joyful Investors and Manager of The Moneyball Portfolio. I graduated with a degree in Economics in National University of Singapore (NUS). My previous experience with traders at the Merrill Lynch enable me to realize many counter-intuitive truths about how the financial markets work and to uncover the challenges faced by many new investors. We believe that investing can be astoundingly simple and want to make financial education understandable for everyone.

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