the more research,

Should you spend countless hours researching a stock before buying it, or just a few hours? The common wisdom is that the more time you spend on research, the better your investment results will be. But is this correct?

Not according to studies on the subject. At least two I have seen came to the conclusion that anything more than a cursory review of a company’s prospects is a waste of time. One study looked at whether more information was useful to experienced horse racing gamblers. The researchers first gave the gamblers a few items of relevant information (age of horse, pedigree, jockey, etc) and asked them to predict which horse would win the race.

They then gave out dozens more items of information about the race
and asked the experts to predict again, based on the additional information they had received. The conclusion was that the first few items of information given to them were useful but further information had no effect on the accuracy of their predictions. The gamblers were far more confident about their predictions after receiving more information, but this didn’t translate into accuracy.

Another study showed that sell-side stock analysts, who spend 50-80 hours a week on research and presumably have loads of information at their fingertips, are no better than a monkey with a dart at predicting a company’s five-year earnings growth rate. In fact, they are actually worse than a monkey with a dart because they tend to project the recent past into the distant future, rather than assuming growth will revert to the mean. If the analysts’ projections were simply random, the results may have been closer to reality.

[via pohick2@chucks_angels]