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   This is a translation of the former paper published by André Gosselin on the OrientationFinance.com web site on April 14 2005 ( Read the original paper in French here).


   * 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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