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* Paper written by André Gosselin published
in "Affaires Plus".
For some of my friends, the purchase of a car or
a house is a true headache in front of a so large choice. They can spend
hours in a bookshop without ever buying anything because of the too
great number of books on the shelves. When they enter a video club, they
generally leave it the hands empty, unable to stop their choice in front
of the new films of the month. A so big choice, for them, is actually
quite embarrassing.
I say to them that they would make poor
investors, since they are more than 1 000 companies registered with the
Toronto Stock Exchange, and nearly 10 000 in the United States. But how
do you choose the securities to put into your portfolio in all this
jungle, they ask me? My answer: data processing. Financial databases,
updated daily, help the majority of the portfolio managers to sort the
thousands of securities quoted on the market, in order to retain only
those which answer their criteria of selection. As the world of the
investment is first of all a universe of figures and statistics, the
task to choose is largely facilitated.
It should not to be believed however that every
pension fund and mutual fund manager uses, regularly and in a
systematic way, the stock exchange databases and the power of the
computers. Those which seek the companies managed by an honest and
qualified management team claim to use their "instinct", with all that
includes in terms of risk, inaccuracy and mystery. Others say to favour
the companies expected to experience a strong sales and benefit growth
within the next 5 to 10 years, without identifying clearly what kind of
crystal ball they use to find their answer.
I have learned year after year that those which
perform the best with these qualitative approaches have in fact access
to a vast network of contacts (financial analysts, journalists,
researchers, company owners, senior officials, etc...) which helps them a
lot in their approach. It was the case with Peter Lynch, the famous
manager of the Magellan fund from Fidelity. And I also think that a
great part of the success of Warren Buffett is based on his capacity to
build a network of open-eyed advisors.
In front of the huge choice of securities
which are offered to him, the amateur investor is not totally unblessed
of technological means. He manages to reduce its anxiety and its
paralysis in front of the range of securities within he will have to
choose, with more or less happy results.
The economists have taught us, for example,
that the small investor who manages himself his portfolio does not
hesitate to call upon his friends, his work colleagues or his parents
to build a stock portfolio. Like the large investors of this world, it
needs to know if the securities he prefers are also sought-after by
people of its environment.
The individual investor has also a strong
preference towards the companies of his city, his area or his province.
This local skew, which can be observed in Quebec as well as in Canada or
in the United States, gives normally good results in terms of
yield, because the investors have much more information on the
companies which are established in their homeland (which buys, which
sells and which hires in their homeland) that on those which do not
make business in their environment.
The decision-making process of the independent
investors begins to be well-known by researchers. A recent study of
Terrance Odean and Brad Barber, two researchers from the University of
California, showed that the investor, when comes the time to buy a
security, will choose one among those which he hears about a lot at
that time in the media, or also among those which have experienced an
abnormal volume of transactions during the last few days, or among
those which have risen or sunk in a drastic way during the very last
sessions.
For the majority of the investors, say the
researchers, the cost is a too high to make the analysis of all the
companies they know well to finally choose one which will be part of
their portfolio, and this cost is lowered when the investor decides to
make his choice among the securities which draw his attention at that
time. Unfortunately, the stocks they buy this way perform less, over
the next 12 months, that those that they sold (those ones keep on
performing well even after they have sold them). All is not gold that
glitters!
André Gosselin
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