Familiarity breeds under-performance (The Financial Athlete #69)

Want to improve your game? Then play a wide variety of players.

Many recreational tennis players limit themselves by playing only with the same people. Some single players only play against the same person on a comparable level. Certainly, it’s fun and relaxing to play with someone you’re very familiar with, but this won’t elevate your level of play. It’s too easy to anticipate a familiar opponent’s moves and her strengths and weaknesses.

Never confuse familiarity with knowledge. Knowledge breeds productivity. Familiarity breeds under-performance, or — at best, stagnation.

Many stock pickers under-perform returns on the S&P 500 index fund primarily because they choose a stock based on their familiarity of the company. Had they not been familiar with the company and read the financial statements objectively, they would never consider buying the stock. To rely on familiarity is to grow complacent and too forgiving of the company’s shortcomings.

Employees who are not in senior management should resist the temptation to buy discounted shares of the company unless they can flip those shares for a quick profit. Otherwise, they may fall into the trap of investing on the basis of familiarity. As an employee, you are already invested in the company with 2 of 3 of your personal resources. These are time and energy. Diversify your third resource, which is money, into other places.

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