In Andrew Hallam’s book Balance, he corrects a common misconception about what it means to buy a company’s stock and cautions against emotional investing (Hallam, 2022). Firstly, to buy stock (e.g. shares) of a company means to purchase a portion of the company. Shares of publicly traded companies are traded at stock exchanges and can be purchased by individuals or institutions. By owning stock of a company, the value of your stock will change as the value of the company changes, which is generally based on its financial performance (earnings) and its future outlook. The company may choose to distribute some of its profits as dividends to stockholders, rewarding investors.  

Amateur investors may choose to invest in a company based on their emotions and feelings about the brand or products, rather than on business metrics, including earnings, valuation, growth projections, etc. Some may also believe that buying stock in a company supports the company. I’ve heard things like, ‘I’m going to invest in Nike, because I want to support the company. However, if you spend your money on stock of a company you are fond of, your money is not helping the company to produce more of its goods or services, invest in capital expenditures, or increase its profits. Your money supported the shareholders more than the operating business.

Contrarily, some may choose not to invest in companies whose products or practices they don’t like. Investing based on your personal views – whether negative or positive – of a company may lead to poor financial results. For example, in the 2000s, the media reported the use of child labor in the manufacturing of Apple’s electronics. $10,000 invested in Apple stock in 2008 would have been worth $540,000 fifteen years later in 2023. But if you had decided against buying Apple stock in 2008 because of the child labor allegations and instead invested the $10k into a seemingly more noble – and most reliable car maker – Toyota, your investment over the same fifteen-year period would have grown to only $21,000. This emotional decision in 2008 would have cost you around $519,000. Your decision not to invest in Apple did not hurt the company at all or cause it to change its manufacturing standards. Only you were negatively impacted by deciding not to invest in Apple because of emotional investing.

It can be very challenging to choose correct individual companies to invest in. Even the best investors make mistakes. The truth is that there are many factors that are impossible to predict that will affect the value and growth of a company. Personally, I avoid selecting individual companies to invest in, and instead, I buy funds (exchange traded funds and mutual funds) that invest in an array of companies. These funds may track certain sectors (e.g., healthcare, energy), or an entire index (e.g., S&P 500). By investing in one of these funds, you are predicting the future success of an entire sector or economy. For example, if you invest in an S&P 500 index fund, you are buying stock in the top 500 largest companies in America. Of course, some of these 500 companies will prosper while others fail, but on average, you expect growth over time. By investing in diversified funds, you remove much of the guesswork, uncertainty and emotion from the investment.

References:

Hallam, A. (2022). Balance: How to invest and spend for happiness, health, and wealth. Page Two Books, Inc.