In his book – Value Investing: Tools and Techniques for Intelligent Investment, James Montier provides a great illustration of the human bias towards growth/glamour stocks. Here’s an excerpt from the book:
Interestingly a recent psychology study may well relate to these findings. Taylor and Butcher (2007) gave 96 students identical accounts of an old lady being mugged. Each was shown a picture of the defendant.
There were four possible photos, and each student was shown just one. Two of these photos were rated by an independent group as ‘very attractive’; the other two were rated as ‘homely’ which appears to be a euphemism for butt ugly (a category I can speak on with some authority, being a leading member!)
The students were asked to assess the likely guilt of the defendant on a scale of 0–5. The attractive defendants scored an average of 2.3, the ugly defendants 4.4! A near doubling of the likely guilt score driven by looks alone! The students were also asked to recommend a jail sentence (up to a maximum of 10 months). The ugly defendants faced an average jail time of 7 months, the attractive defendants just 4 months (Figure 10.4).
Growth stocks are the attractive defendants of the finance world. It is easy to buy a stock like the most admired stocks from the Fortune list discussed above; however, thankfully the financial markets are slightly better than jurors at working out the end punishment!
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