No, I'm not referring to the 1985 Steven Spielberg movie starring Whoopi Goldberg and Oprah Winfrey...rather I'm thinking about my bedroom closet. As I pondered which shirt to select one recent morning, it dawned on me that I own a larger than average selection of purple, fuchsia, magenta, violet, lavender and plum shirts...along with several shades of slightly odd green shirts (note that is not a picture of me below). Not being very fashion conscious, it occurred to me that the accumulation of these slightly offbeat shirts has occurred as a result of my usual shopping choice over the years...Nordstrom...Nordstrom Rack that is.
Right about now you should be wondering "what does this have to do with investor behavior?" Good question. A decent dress shirt at Nordstrom will set you back anywhere from $100 to $200...while Nordstrom Rack has dress shirts for around $30 or $40. Yes, at times the patterns and colors can be a little unusual-bargains are rarely popular, for if they were popular, they'd be sold...so when the funny color shirt-like the one I'm wearing now-sits unsold for a while at Nordstrom, it's eventually passed on to the bargain-basement Nordstrom Rack. For me anyway, it wears the same, feels the same, and costs a whole lot less.
Unlike shirts, in the stock market the price you pay is a major factor in your ultimate satisfaction...what might be a great investment at $20 per share could be a complete disaster at $200 per share. In fact, in many cases the price paid can be THE MOST IMPORTANT factor in investment success...and unlike a shirt, you can't return an overpriced stock. Further, while an overpriced shirt won't hurt your financial situation, an overpriced investment can.
Fortunately, the stock market provides occasional opportunities to buy a $200 shirt for the equivalent of $30 or $40...you're buying a popular shirt at a very unpopular price...but the hard part is these periods usually occur when markets are depressed, and investors are frightened and unable to act decisively. If you want to be a successful investor, consider buying when the world is treating stocks like the lonely purple, fuchsia or chartreuse shirts at Nordstrom Rack...unpopular, unloved and on-sale, despite actually being an expensive Armani or Burberry shirt. If you think and behave this way, you'll probably do well enough to spend lots of time at Nordstrom buying truly fancy shirts, if you desire. Or in my case, not.