We all treasure the quality of loyalty. Sometimes it is important to define what or who we are being loyal to.
For instance, I have had many clients in the Seattle area explain to me what Microsoft has done for their life and finances. With that in mind, they tell me to never sell the stock due to their emotional commitment. Others have inherited stock from a loved one and they want to cling to that possession like they would to Grandma’s old wedding ring or Grandpa’s collection of family photographs.
Very often, we investors tie our decisions to emotional considerations. Stocks are traded on what’s called the secondary market. For example, if I purchase 1,000 shares of Microsoft, none of the money goes to Bill Gates or to Microsoft. Instead, it goes to the seller of that stock who could be Mrs. Neusbaum from Atlanta. When I sell Microsoft, it may be to a buyer that day named Fred from Walla Walla. Microsoft and Bill Gates have nothing to do with these transactions, since these trades are on the secondary markets. Microsoft received its money during the early eighties during their initial public offering (IPO).
It’s interesting to note that most of us spend countless hours shopping for the very best deal on most everything we buy. When we search for real estate, for example, we look at several houses and ask our real estate agents for “comps” on comparable houses to be sure we buy at the right price. For some reason investors don’t bring this mentality into choosing their investments. Many of them fall in love with a certain company and hold on, no matter what is happening in the market or what the stock’s price has become.
I also run into a similar issue when discussing the notion of investing with the goal of social responsibility. Many people believe that when they buy stocks on the secondary stock exchanges, they are making a big difference in the world. It’s a nice thought, but not exactly true. My advice would be to invest in a valuation-centric and diversified way. When it comes to philanthropy, give your time, money or support directly to the causes of your choice, not through the stock markets.