 CHAMPAIGN -- Novice investors earn
lower stock returns when they seek an edge by wading through complex
financial data rather than relying on experts to guide them, a study by two University of Illinois professors shows.
Fledgling traders often overestimate
their market savvy, thinking they can glean investment fodder that
analysts overlooked in statistic-filled corporate and government
filings, said W. Brooke Elliott, a professor of
accountancy who has studied investing since 2001.
Elliott says some ordinary investors
have enough skills to turn the reams of raw data into higher
returns. Those who don't are better off using analyst research to
make buying and selling decisions, said Elliott, who co-wrote the
study with accountancy professor Kevin Jackson.
"There's a mismatch when you use
information that you really don't have the ability to use," said
Elliott, whose study will be published next year in Contemporary
Accounting Research, a leading academic journal. "You'll earn lower
portfolio returns than you would have had if you had just relied on
an expert's report."
Elliott said the survey of more
than 400 average, non-professional investors shows experience
ultimately helps some traders increase earnings by sifting through
complicated corporate reports and U.S. Securities and Exchange
Commission filings.
"Around six years, you start to see
some improvement. We think they likely develop expertise in terms of
the types of strategy they want to execute. And I think they just
become more familiar with the financial reports," Elliott said.
Elliott and Jackson say they aren't
surprised by overconfidence among investors, especially those who
have an accounting or finance background.
[to top of second column] |
 "They probably feel that in order
to do as well that they should use the same information as
professional analysts," Jackson said. "I think people have a
tendency to see what the professionals do and try to mimic it."
Jackson, who has studied investing
since 2003, says he hopes the survey convinces novice traders to be
honest with themselves and lean on experts until they have enough
experience to tackle raw data on their own.
"It does kind of surprise me that in
the face of being at a disadvantage in using certain types of
information that they still use that information as much as the
professionals who benefit from it," Jackson said.
Elliott said investors likely are
best served by a combination of careful research and patience as
they learn the ins and outs of trading on Wall Street.
"You can read a book about golf,
but unless you go out and play you're not going to be very good,"
Elliott said. "The opposite is true as well. You can't just grab
some random club and step on the first tee. But I think a lot of
times investors do one or the other."
[Text copied from
University
of Illinois news release]
 |
