Infatuation and chocolate both produce a dopamine high. A gooey fudge brownie might not be an exact substitute for a hot date, but hey, the sugar rush will get you through the night!
Along the same lines but possibly more dangerous, some investors get a charge out of betting on one stock. They obsess and believe it is the one.
As a portfolio manager, I can recall three examples of this behaviour.
I once met with the CEO of an advertising company who had $1 million invested, but all in one stock: an international firm in his industry. He felt that he was diversified because his business dealings were local and this company was multinational.
The problem is the market doesn’t always act so logically and if advertising revenues are down in general, all stocks in the same sector are likely to be vulnerable. It isn’t uncommon for experts to feel they have a better understanding of their industry than the general public. While that is undoubtedly the case, this knowledge doesn’t always predict or protect them from stock price movements.
Then there was the time I met with the CFO of a software company whose entire investment portfolio consisted of $10 million worth of stock options in his own firm. His wife was concerned that all of their wealth was “on paper” and she would have liked to have at least $1 million in “real money.”
But the CFO was worried about the perception within the firm if he were to exercise options and start selling stock. So he continued to be tied to the stock price of one company for not only his paycheque and his career, but also his family’s financial future.
Next, a glaring example of how emotions can interfere with logic. An older gentleman had invested wisely his entire life, but he started to become disenchanted with the goings-on in the world last year. On a whim, he cashed in his entire retirement account and used the proceeds to buy a single gold stock. He felt somehow that this was the ultimate way to protect his wealth and put his affairs in order. Unfortunately not only did gold have a bad year as an asset class, but his particular stock was the worst of the lot.
No matter how compelling the idea, it's almost always a bad idea to fall in love with one stock! As one final cautionary tale, a young woman I interviewed in Paris recently told me: “After school I got a great job at Lehman Brothers and moved to London. I was proud to work for such an established investment firm. I became very involved in my career.
“Then I watched the price of Lehman Brothers go from $80 to zero during the two years that I worked there. I was so shocked. I stared at the stock price every single day until the day they declared bankruptcy. That day I lost my job and my investments.”
Don’t get me wrong — I have a lot of time for romantic fools. And chocolate for that matter! But as a wise woman in Tel Aviv told me last year: “I buy into dreams in many respects...but not with my money.”