The Price of Investment Popularity

Jul 2018

Due to documented investor biases and behaviors commonly known as confirmation bias and recency bias, among others, there is a real tendency for investors to overvalue currently popular companies and undervalue currently unpopular ones.  Let’s be clear here:  There may well be good reasons for companies to be popular or unpopular, and justifiably popular companies should be valued more highly than justifiably unpopular ones.  However, there’s an important difference between “highly valued” and “overvalued.”  Popular and unpopular companies tend to become temporarily overvalued and undervalued, respectively, and these temporary tendencies are exploitable in our quest for investment return.