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.

• Experts 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 investment choices.
• Experts 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.