The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [55]
“Experts” gave the idea credence too. In an interview televised on CNN in late 1999, portfolio manager Kevin Landis of the Firsthand Funds was asked plaintively, “How do you do it? Why can’t I do it, Kevin?” (From 1995 through the end of 1999, the Firsthand Technology Value fund produced an astounding 58.2% average annualized gain.) “Well, you can do it,” Landis chirped. “All you really need to do is focus on the things that you know, and stay close to an industry, and talk to people who work in it every day.”2
The most painful perversion of Lynch’s rule occurred in corporate retirement plans. If you’re supposed to “buy what you know,” then what could possibly be a better investment for your 401(k) than your own company’s stock? After all, you work there; don’t you know more about the company than an outsider ever could? Sadly, the employees of Enron, Global Crossing, and WorldCom—many of whom put nearly all their retirement assets in their own company’s stock, only to be wiped out—learned that insiders often possess only the illusion of knowledge, not the real thing.
Psychologists led by Baruch Fischhoff of Carnegie Mellon University have documented a disturbing fact: becoming more familiar with a subject does not significantly reduce people’s tendency to exaggerate how much they actually know about it.3 That’s why “investing in what you know” can be so dangerous; the more you know going in, the less likely you are to probe a stock for weaknesses. This pernicious form of overconfidence is called “home bias,” or the habit of sticking to what is already familiar:
Individual investors own three times more shares in their local phone company than in all other phone companies combined.
The typical mutual fund owns stocks whose headquarters are 115 miles closer to the fund’s main office than the average U.S. company is.
401(k) investors keep between 25% and 30% of their retirement assets in the stock of their own company.4
In short, familiarity breeds complacency. On the TV news, isn’t it always the neighbor or the best friend or the parent of the criminal who says in a shocked voice, “He was such a nice guy”? That’s because whenever we are too close to someone or something, we take our beliefs for granted, instead of questioning them as we do when we confront something more remote. The more familiar a stock is, the more likely it is to turn a defensive investor into a lazy one who thinks there’s no need to do any homework. Don’t let that happen to you.
Can you Roll Your Own?
Fortunately, for a defensive investor who is willing to do the required homework for assembling a stock portfolio, this is the Golden Age: Never before in financial history has owning stocks been so cheap and convenient.5
Do it yourself. Through specialized online brokerages like www. sharebuilder.com, www.foliofn.com, and www.buyandhold.com, you can buy stocks automatically even if you have very little cash to spare. These websites charge as little as $4 for each periodic purchase of any of the thousands of U.S. stocks they make available. You can invest every week or every month, reinvest the dividends, and even trickle your money into stocks through electronic withdrawals from your bank account or direct deposit from your paycheck. Sharebuilder charges more to sell than to buy—reminding you, like a little whack across the nose with a rolled-up newspaper, that rapid selling is an investing no-no—while FolioFN offers an excellent tax-tracking tool.
Unlike traditional brokers or mutual funds that won’t let you in the door for less than $2,000 or $3,000, these online firms have no minimum account balances and are tailor-made for beginning