Attention And Which Stocks Get Bought

Choosing what to sell and choosing what to buy are asymmetric problems for an individual investor, and the asymmetry shapes portfolios more than most owners realize.

The two problems are not the same size

Selling involves choosing among the handful of positions already owned, a set small enough to consider in full.

Buying involves choosing from thousands of listed securities, which cannot be examined and must therefore be narrowed before any evaluation begins.

The narrowing usually happens before conscious deliberation, and what does it is whatever put a company in front of the investor in the first place.

What captures attention

Companies in the news, those posting unusually large price moves, and those trading on abnormally high volume are far more likely to be bought by individuals.

Familiarity contributes as well, so employers, well-known consumer brands and locally significant firms appear disproportionately in individual portfolios.

None of these characteristics constitutes a reason to expect anything from the investment. They determine visibility, which then determines the candidate set.

Why the direction is buying rather than selling

An attention-grabbing event brings a company to notice among people who do not own it, which is nearly everyone, and their available action is to buy.

Existing owners are already aware of the holding and were not prompted by the event in the same way, so the selling response is weaker and more dispersed.

The aggregate result is that individual buying concentrates in attention-grabbing names while selling spreads across whatever is already held.

What this does to a portfolio

Portfolios assembled this way tend to be concentrated in prominent companies and in whatever sectors have recently been in the news.

The composition reflects the coverage patterns of financial media more than any deliberate view about how the money should be allocated.

It also tends to be highly correlated internally, since prominent companies frequently share sector exposure and respond to the same conditions.

Replacing the filter deliberately

The remedy is choosing the narrowing criteria in advance rather than accepting whatever attention supplies, which is what a stated screening process does.

Broad index exposure sidesteps the problem entirely, since the candidate set is defined by index rules rather than by visibility.

Either way, the observation to hold onto is that the shortlist matters more than the analysis performed on it, and the shortlist usually arrived unexamined.