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Overruling the Heart: How Science, Data and Experience Can Curb Lovesick Investing

David Carlson | State Street Global Advisors

November 08,2018

The risk of infatuation is real.

After years of constant dialogue with a corporation's management team, you might be smitten by their brilliance and admire their work ethic. Perhaps you're dazzled by a business's track record of innovation and are convinced that its latest product is the next big thing. Whatever the case, seasoned portfolio managers — at least, the candid ones — will concede that it is indeed possible to be so enthralled by a company that it earns a special place in your heart.

This can be problematic. As Chaucer would attest, love is blind ... and the last thing investors and portfolio managers want is to be blinded by their affections for a company as they make critical investment decisions. So how can you keep romanticized notions at bay? Here are three steps to putting your brain, rather than your heart, in charge.

1. Identify unconscious biases ... and fight them.

On my team, we're big fans of behavioral finance research and share with each other whatever studies appear relevant to our work. Those include studies focusing on unconscious biases like confirmation bias, in which a person may focus on information that supports their existing view while ignoring information that contradicts it. For investors partial to a particular company, this might mean that they embrace positive news about a company — better-than-expected earnings results or flashy product debuts, for instance — while ignoring the negative, like high-debt loads or ESG-based concerns.

Falling victim to such selective perception, of course, can lead to negative outcomes. Take, for instance, a study from South Korea in which researchers looked at investors who gathered information on companies through online message boards.1 Researchers identified investors with high confirmation bias when gathering information online and found that those investors were overconfident and ultimately saw lower returns than those who exhibited lower confirmation bias. When we encounter such studies, we stop to ask ourselves and each other: Are we in danger of making the same mistakes? As a team, we also try to gather diverse viewpoints and seriously consider them, rather than immediately discounting whatever doesn't mesh with our own worldviews. The best analysts want to be challenged. They say, "Tell me where I'm wrong. Tell me what I'm missing." Learning as much as possible — from colleagues, from other analyst reports, from news articles, from data analysis (more on that below) and so forth — allows us to reach the best conclusions.

Confidence in your precise and thorough data analysis can forestall the overconfidence inspired by your warm and fuzzy feelings.

2. Take a data-driven approach.

For Olivia Engel, the biggest bulwark against emotional investing, especially as it concerns companies to which you've become emotionally attached, is data. "The numbers are objective and they guard against the idea of falling in love with companies," says Engel, CIO of Active Quantitative Equities at State Street Global Advisors. Of course, the use of data analysis in informing investment decisions is nothing new, but in recent years, the advancement of various technologies, like cloud computing, allows us to crunch numbers faster, meaning we can do more in less time. Whereas in previous years, we might have only utilized quarterly financial statement data to forecast next quarter’s results, now we can use terabytes of individual transaction data to help predict sales of retail companies.

Engel, meanwhile, notes that portfolio managers and analysts can gather information from more sources than ever before, including satellite feeds and mobile phone apps. "We can use data that is tailored to different types of businesses to enable us to forecast returns more accurately and with more success," she says. Confidence in your precise and thorough data analysis can forestall the overconfidence inspired by your warm and fuzzy feelings.

3. Use past experience — yours or that of your peers — to ground you.

One of the reasons Engel is so focused on leveraging data for decision-making is because early in her career, she recalls her own instance of falling in love with a company. "I wrote a research report on a company that I visited, and it was impossible for me to not recommend the company for the portfolio because I'd become so close to it," she says. Engel doesn't want to make the same mistake again. I'll confess my own, similar epiphany: About a decade ago, I was so impressed by a company's innovations that I overlooked legitimate criticisms about their new product. The company over performed at first, but eventually negative news began trickling in, leading to a decline in share price. Yet I was loath to shed the stock from my portfolio because of my faith in the company. I ultimately did drop the stock, but it was at a loss — one that I could have mitigated had I not been so stubbornly infatuated with my investment. Now I try to make a point to separate the company and the stock. That experience keeps me humble and keeps me motivated to overrule my emotions when making investment decisions. Of course, those newer to the industry don't have the benefit of hindsight to rely on, so veterans like me share war stories with younger colleagues, hopeful that they can avoid getting burned like we once did.

It's important to note that you can still have deep respect, admiration or even love for a company without letting those feelings influence your investing decisions. It's not easy, but it's possible. The heart may want what it wants, but investors don't have to give in.

1. Park, J., Konana, P., Gu, B., Kumar, A., & Raghunathan, R. (2010, July 14). Confirmation Bias, Overconfidence, and Investment Performance: Evidence from Stock Message Boards. Retrieved from




Topics: Analytics , Data Analysis

David Carlson | State Street Global Advisors

David is a Senior Managing Director of State Street Global Advisors (SSGA) and the Adviser and a Portfolio Manager and Chief Investment Officer of the Fundamental U.S. Equity Group.