Club Net Among other things, the Internet is producing lazy investors.
(MONEY Magazine) – With members balancing cheesecake on one knee and spreadsheets on the other, the conversation heated up at an investment club meeting I attended recently. On the agenda were discussions of 1) why the club was sorely underperforming the market, and 2) which stock to purchase with that month's funds. Two hours later, I'd decided that the way the club handled the second item pretty much explained the first.
For these investors, the issues that mattered most in their considerations of whether to buy a stock were the stock's 52-week high and low (which they pulled from the Internet) and the number of analysts with buy ratings (also pulled from the Internet). And there was a brief discussion of where the idea had come from (spouses, train buddies and, oh yes, the Internet).
After dismissing the ideas on the docket as boring, conventional or old, the members--"We have to buy something, we only meet once a month," whispered the woman to my left--decided to consider Hasbro, the toy manufacturer. Why? Mostly because one member had heard the company would be strong on sales of Star Wars merchandise. They jumped online and checked a few screens. Within minutes they knew that five analysts had buys on the stock; two had holds; none had sells. Done deal.
Now I come at this from another world, having spent two years in equity research at an investment bank where a company's financial statements were analyzed to death. There were days when I found absolutely nothing of value even after plowing through the umpteenth footnote. But to buy a stock without even reading the financials?
It's certainly not what the National Association of Investors Corporation, the investment club association, had in mind, says NAIC v.p. Bob O'Hara. Neither is it what the club originally intended. "We used to go to the library and look at Value Line," says one member. "It's just not happening anymore." The NAIC encourages clubs to use the Internet to gather the information they need to do a fundamental analysis of a company--to assess, typically, whether a company will be able to double its earnings in five years--but not as a shortcut. Still, he notes: "Having so many tips and recommendations from experts at your fingertips is very tempting."
And very dangerous. "Having a lot of data doesn't mean that you have the knowledge you need. It only means you have the illusion you do," says Terrance Odean, finance professor at the University of California, Davis. His research shows that if you ask people to make a prediction and then give them the information they need in stages, they get a little better at predicting--but they get a lot more confident. The result in the investing world: greater trading volume without greater returns.
So what's an investor to do? Your homework. Take it from me--or from the often misunderstood Peter Lynch. His "buy what you know" dictum never meant shopping in a store one day and buying its stock the next. It meant picking stocks in industries in which you have an edge, perhaps from working in them. And then running the numbers. "It's not that hard to look at a company's financials, its debt load, its position in its industry," he says. "You can't just say, 'That's a good cookie.'"
Well, you can. But you shouldn't.
If you would like to e-mail Jean Chatzky, you can reach her at firstname.lastname@example.org.