Can Just 1 Thing Reveal Your Next Home Run Investment?

"Nothing in life is quite as important as you think it is while you are thinking about it."
--
Daniel Kahneman and David Schkade

Would you be happier if you lived in California?

Chances are that if you don't currently live in California, your answer would be "yes." Or, at least, that's what a 1998 study of roughly 2,000 students by researchers Kahneman and Schkade showed.

In the study, students who lived in the Midwest believed that similar students in California were happier than they were, while the Californians also assumed that they were happier than their Midwest counterparts. Based on the data, the researchers concluded that both groups focused specifically on the climate differences -- certainly people dealing with bitter Midwestern winters couldn't be as happy as Californians soaking up the warm sunrays on the beach. Could they?

But here's the rub: There was no difference between the actual self-reported happiness of both groups. To be sure, the Midwesterners weren't thrilled about the weather in their region, but it didn't hold them back from being just as happy overall as the Californians.

If I were a rich man
In a more recent study by Kahneman, Schkade, and other academics, there was a similar finding after digging into people's expectations about how a higher income would impact happiness. That is, participants assumed that more money would make a much bigger difference on their happiness than was reasonable to assume.

Now you could stop reading right here and have a perfectly good takeaway. We all need to be aware of this "focusing illusion," which causes us to make broad global assumptions about our well-being based on the most obvious aspects of an issue. We figure, for instance, that a higher income will make us happier because we focus on all of the ways money would make our life easier, while ignoring the potential for grueling work hours, a more demanding boss, or a longer commute.

But you came here for investing
As investors, we need to be just as careful about focusing too much on one aspect of a stock. In a world of fast-cut TV, sound bites, and Tweets, it's easy to jump on one obvious, glaring aspect of a company and assume that it paints an accurate picture of the entire company or the stock.

Getting specific, here are a few companies where it's easy to tune into one very obvious feature of the company.

  • Berkshire Hathaway (NYSE: BRK-B  ) . Is Warren Buffett a big deal? You bet your sweet backside he is. And without Buffett, the name Berkshire Hathaway would likely be buried in the annals of history as just another U.S. textile operation that faded to black. But the Berkshire of today is a massive conglomerate that wholly owns many companies that are run by many savvy operators. It also has a huge stock portfolio with multibillion-dollar positions in companies like Procter & Gamble (NYSE: PG  ) and Wells Fargo (NYSE: WFC  ) . In other words, Berkshire is much more than its CEO.
  • Sirius XM Radio (Nasdaq: SIRI  ) and Chipotle Mexican Grill (NYSE: CMG  ) . Peter Lynch is famous (infamous?) for advising that you should "buy what you know." While this can be a great starting point for an investment, just because you like Sirius' service or Chipotle's burritos doesn't necessarily mean that you're looking at a good investment opportunity. Is the product nicely profitable? Does the company have a sound balance sheet? Is the stock's valuation reasonable? These are just a few questions you need to explore even if you think the product is the greatest thing since sliced bread.
  • Annaly Capital (NYSE: NLY  ) and Chimera Investment (NYSE: CIM  ) . You don't need to tell me that dividends are back in vogue -- I'm well aware. But investors focusing solely on grabbing the fattest yields out there may be ignoring the bigger picture at the companies they're investing in. When it comes to mortgage REITs like Annaly and Chimera in particular, my fellow Fool Alex Dumortier noted this week that the group could run into trouble because of the way they finance themselves. And, as Alex put it, "the dividends aren't free money."

Keep digging
There's nothing wrong with being drawn to a company because of some big headline issue -- a great CEO, an innovative product, a hotshot institutional investor that's taken an interest. But be careful about letting that act as a halo over the entire company and assuming that one feature makes it a great investment for you. Instead, do your homework, explore further, and get to know the entire company.

My fellow Fools may have been drawn to this group of 13 stocks because of their dividend yields, but they think these stocks are the real deal. Check out the special report "13 High-Yielding Stocks to Buy Today" free by clicking here.

And next time you're sitting around thinking that the grass may be greener elsewhere, just remember, California is a great place, but it also has high taxes, soul-sucking traffic, and -- in the most desirable areas -- a cost of living that can make even the wealthy feel like they're scraping by.

The Motley Fool owns shares of Berkshire Hathaway, Annaly Capital Management, Chimera Investment, and Chipotle Mexican Grill. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Procter & Gamble, Chipotle Mexican Grill, and Berkshire Hathaway. They have also recommended creating an iron condor position in Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (7) | Recommend This Article (26)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 13, 2011, at 5:47 PM, xetn wrote:

    "Can Just 1 Thing Reveal Your Next Home Run Investment?"

    I rely on tea leaves almost exclusively. :)

  • Report this Comment On July 13, 2011, at 10:31 PM, rocketman67 wrote:

    California would be the last place in the US I'd want to live.

    The saying "as California goes, so does the Nation"!

    So very true.....look at the mess the US is in!!

  • Report this Comment On July 14, 2011, at 3:41 PM, sgperformer wrote:

    Being from So Cal for 21 yrs after having lived 25 yrs in Chicago, I will say that you are right about what you state in your article.

    Having said that, however, you couldn't get me to move back to the Midwest for anything (unless I could move back here soon).

    Moving to Texas is an option that I would consider.

  • Report this Comment On July 14, 2011, at 3:46 PM, sgperformer wrote:

    as far as investing goes - I love the advice, especially the opening quote. Thank you for the article!

  • Report this Comment On July 14, 2011, at 8:12 PM, Sunny7039 wrote:

    I frankly think these "happiness" studies are pure nonsense insofar as they pretend to describe the vast majority of people.

    First of all, self-reporting is notorious for being seriously skewed. People will say what they think is expected of them. Whether it actually reflects their inner life is highly problematic.

    Second, I think that one's environment is often much more important than most people suppose it is. This is because people have an illusion of greater control than they actually possess. The reality that, for example, the number of sunny days per year can make a significant difference in your life is not something most of us want to believe. It's so much more reassuring to think that, sunny or not, you can and will be equally happy in the long run. Financially secure or not, you will be equally happy . . . in good health or not, you will be equally happy . . . losing your parents when you are young, or when you yourself are close to retirement, you will be equally happy . . . having successful children, or having a child end up in prison, you will be equally happy . . . enjoying a long life with a loving spouse or widowed early, you will be equally happy.

    Yeah. Sure.

    I also think that studies which focus on the reported happiness of college students are certain to be wrong. You are talking about a population with little experience of adult life, and one that is generally not fully self-supporting. How much would you expect them to know about happiness? They are the ones being interviewed only because they are a low-cost, captive audience, not because they are representative of "people in general."

    But what I really want to know is -- how can people lap this up?

    Doesn't anyone think for themselves any more?

  • Report this Comment On July 14, 2011, at 8:17 PM, Sunny7039 wrote:

    One last thought -- MANY things are more important than they seem when you are thinking about them.

    If you don't believe that, try keeping a serious journal. Then, be honest about all the things you wrongly missed or discounted as trivial. Be honest with yourself about the full ramifications of what seemed like small decisions at the time. Be honest about the ones that started small, and gave rise to snowballs.

    Then again, maybe it's better to believe a "useful fiction" or two.

  • Report this Comment On July 15, 2011, at 2:26 PM, TMFKopp wrote:

    @Sunny7039

    Tell me how you really feel!

    There have been plenty of studies on happiness that have used subjects other than college students. College students just happen to be -- as you correctly assert -- cheap and readily available, so they're often used. But I think it's wrong to assume that they don't know what happiness is. It's a relative concept and so it's silly to say that if one person says they're happy you can tell them, "Oh you don't know what happiness really is."

    If you're happy, you're happy.

    But since I am very interested in this field, I was wondering if there's any research or papers that you can point to that tell a different tale, or whether it's just your personal opinion that this is all hogwash.

    Matt

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