Listen to the experts
Why are novice investors so attracted to expert advice?
There are a number of reasons:
Experts know more about markets and hence are less
likely to make mistakes: Investing can be
daunting, especially in today’s markets, where choices abound and investments
becomes increasingly complex. Investors worry about putting their pension funds
and savings at risk by picking the wrong investment at the wrong time and
assume that experts can steer them away from catastrophic mistakes.
can bring more resources (data, models, people) to the stock selection
process and hence can pick better investments: Individual investors are constrained in terms of how much time
they can spend on analyzing investments and how much resources they can
bring to the process. An equity research analyst at an investment bank or
a portfolio manager at a mutual fund can bring more resources and more
time to investment analysis and presumably this pays off as better
have better access to private information (buzz, rumor, news) and hence
get advance notice of big happenings: Markets
move on information and investors with timely access to good information
should be able to use that information to earn higher returns. While individual investors may not
be able to talk to the managers of a firm, analysts have access to the
highly placed sources. Many investors assume that information is leaked to
Wall Street before it gets to Main Street.