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Hope is not an investment strategy

With thanks to Carl Richards

You’ve probably heard it at least once before: Invest in what you know. Warren Buffett has previously referred to it as the circle of competence, or only investing in the companies you can understand. Now this has sometimes been interpreted as invest in the companies that make the products you buy and own.

It’s probably one of the underlying reasons why Apple stock became so popular as a single stock purchase. People’s love of its products got translated into thinking the stock itself must make a good investment. While it’s a good thing to be happy with the stuff you own, it doesn’t automatically lead to the understanding that Buffett referred to.

There’s a similar thing happening with the idea of investing local. There have been funds before based on companies in particular states, but the firm LocalShares Inc. recently announced its plans to create funds based on public companies in a given city. At its heart, this concept relies on the idea that you’ll want to invest in the businesses you visit. But just like investing in Apple because we own an iPhone, we’re substituting one type of knowledge for another.

To start, the group is offering a Nashville fund. You’ll probably see one thing right off the bat when you view a list of the companies included in the fund. They’re only local in the sense that they have a presence in Nashville, but they are by no means limited to Nashville. Added to that, the fund also leans heavily toward health care.

I have no idea how this fund will perform. The same would hold true even if I lived in Nashville.

This fund may be perfect to add to your investment portfolio, but it wouldn’t have anything to do with the fact that it’s based on businesses with a location in Nashville. Instead, it would require a careful assessment of what you already own and seeing if this fund fills any particular gap in your strategy.

That sounds incredibly boring, right? It’s much more exciting to be “bullish” on Nashville like its mayor, Karl Dean.

The reality is that when we start looking for investing shortcuts, like this idea of investing local, it’s very easy to substitute emotion for logic. We take the leap because we feel good about one thing even though it may have no measurable impact on the outcome of another.

But the last time I checked, hope isn’t a particularly wise investment strategy. Keep that in mind the next time you’re tempted to leap.

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