Many Investors Spend 6 Minutes or Less Researching Stock Buys

New research reveals retail investors spend just 6 minutes researching stocks before trading, yet their collective behavior is increasingly driving market movements as trading volumes surge and buy-the-dip strategies become more aggressive. Broadcast Retirement Network's Jeffrey Snyder discusses the study and improving investor education with NYU Stern School of Business' Toomas Laarits.

JEFFREY H SNYDER, BROADCAST RETIREMENT NETWORK

(0:04) This morning on BRN, investors spend less than six minutes on their stock buys. (0:11) Joining me now to discuss this and a lot more, Professor Thomas Lawrence is with the NYU Stern School of Business. (0:18) Thomas, great to see you.

(0:19) Thanks for joining us on the program this morning.

TOOMAS LAARITS, NYU STERN SCHOOL OF BUSINESS

(0:22) Glad to be here.

JEFFREY H SNYDER, BROADCAST RETIREMENT NETWORK

(0:23) We're going to talk about some great research that you and your colleagues did on how individual investors make their stock decisions. (0:32) What led you to consider doing this type of research? (0:36) I think it's certainly warranted, but why taking a look at the decision-making for individual stocks?

TOOMAS LAARITS, NYU STERN SCHOOL OF BUSINESS

(0:43) Well, thank you, Jeff. (0:44) In many ways, it was just an opportunistic move by our part. (0:49) We got access to this very unique dataset that keeps track of individual households' web browsing.

(0:55) In particular, we have their full web search histories, full browsing histories from a couple of months in 2007. (1:02) This data is collected quite broadly and used in marketing studies, but we got a chance to take a look at it. (1:09) We thought it would be a great chance to say something new, document new facts about research that individuals do about their stock investments.

(1:19) In many ways, it was just an opportunity that presented itself to us. (1:26) The question of what retail investors do, how they trade, I think that has a very long standing history in finance. (1:33) I'm glad to talk about that more as well.

(1:36) We're building on a long history of academic work, but we have the upper hand of a special new dataset at our disposal.

JEFFREY H SNYDER, BROADCAST RETIREMENT NETWORK

(1:44) Yeah, and just to follow up on that, looking at the study, I'll just give you my opinion. (1:51) You can tell me if I'm right or wrong. (1:53) Six minutes on average doesn't seem – there are professional analysts out there that work for major asset managers that spend a lot of time sifting through earnings records and data about a particular company before making a recommendation.

(2:10) It doesn't seem like individual or retail investors are spending a lot of time before they jump in both feet first.

TOOMAS LAARITS, NYU STERN SCHOOL OF BUSINESS

(2:18) That's certainly one of the takeaways we got. (2:20) What we found in our dataset is among households that trade individual equities in this sample, it's about 30 minutes on average. (2:31) The average household carries out 30 minutes of research per trade on the stocks that they trade, whereas the median household, so the representative household, if you will, carries out only six minutes.

(2:41) Like you say, there's only that much you can do in six minutes, and we're probably not going to be finishing this interview in six minutes. (2:47) Between now and then, how much research can one plausibly do? (2:51) I think it was a type of piece of data that researchers really haven't been able to document before, so we were quite intrigued to see both the level, the mean, the median, as well as the full distribution.

(3:06) For sure, our first takeaway is individual investors do not carry out a lot of research on average. (3:14) Another aspect that stands out quite strongly is the research they do carry out substantially concentrated right before the trade. (3:25) It does suggest to us that a lot of investors get excited about an idea and then jump in both feet, as you just said.

JEFFREY H SNYDER, BROADCAST RETIREMENT NETWORK

(3:35) Do you think the idea comes to them, they're talking at the water cooler, at the office? (3:41) I don't even think there are water coolers anymore, but the proverbial cafeteria talking about something, or they hear it from a friend, then go online, do a little research, and say, boom. (3:55) That's what it seems like to me, not looking at the data set.

(3:59) That doesn't seem like, from someone who's been in the retirement industry for 30 years, probably not the soundest investment approach, although I guess you could get it right more so than not.

TOOMAS LAARITS, NYU STERN SCHOOL OF BUSINESS

(4:09) For sure, there's a strong sense, and we have some quantitative evidence on that, regarding the importance of recent returns. (4:19) Stocks that have done really well or stocks that have done really poorly tend to garner quite a bit more of these retail investors' attention. (4:27) Some of it is just fed to them by their brokerage sites.

(4:29) If you think you log in today on your favorite site, or you read your favorite newspaper, there tends to be a top movers panel that emphasizes the stocks that saw the big news of the day. (4:44) There are some ways that stocks get thrown into the orbit of individual investors. (4:50) For sure, I think we confirm that large moves in the past are important.

(4:57) There are some other aspects as well. (4:58) One interesting aspect of our data, it happens to be from four months in 2007. (5:03) Some of your viewers might recall that was the time when the first iPhone came out in January 2007.

(5:11) The largest, the most popular stock in terms of households that carry out any research on it in our sample is Apple. (5:20) That's quite surprising to me right now, of course, the biggest company in the world, but at the time, Apple was only ranked 33 in market cap. (5:28) With the introduction of the iPhone being in the news, it actually was the most researched stock by our retail investors.

(5:38) Sometimes the water cooler talk or the product market attention might put in the retail investors on the tracks of a good investment as well.

JEFFREY H SNYDER, BROADCAST RETIREMENT NETWORK

(5:49) Yeah, obviously for those individuals, as you said, it paid off. (5:52) We've got the iPhone, I've got my Apple Watch on. (5:54) Their company has really taken off and continues to soar with amazing products.

(6:03) What does this mean for, do we need to spend more time, Tom, with education? (6:10) Financial literacy, we just passed April, which was financial literacy month. (6:14) I just want to kind of take it back there.

(6:16) Does this signify that maybe there's an opportunity here to educate a little bit better? (6:22) What I would hate to see, and to me it almost feels like the short period of time that people are looking at things, and the reason that it's momentum driven, it's almost like gambling in some ways, where you just jump in, you see the hot table. (6:41) Not that I'm a gambler, but you see the hot roulette table or the hot poker table or the blackjack table, and you just jump in and it's momentum driven.

(6:49) Are there some opportunities here for better investor education at all? (6:56) No, for sure, for sure.

TOOMAS LAARITS, NYU STERN SCHOOL OF BUSINESS

(6:58) Let me answer in two parts. (7:01) First, at a very broad level, I think the investor education should really focus, even on a step before investing in any individual stocks, investor education should focus on the broad base of a well-diversified portfolio in an index fund with lower management fees and so on. (7:19) We can come back to that later, but to keep on the study at hand for a moment, one thing that kind of comes out from this type of data, one, households spend quite a small amount of time on researching.

(7:35) Another thing that comes out is the research they do carry out kind of tends to focus substantially on a couple of categories. (7:42) In particular, in terms of mean amount of time spent, about a third of the time these households spend on research, they focus on price charts, so just looking at price paths. (7:54) So kind of information and these price paths in turn, as they're presented by the brokerage sites, kind of by default, tend to have pretty short look back windows, typical often intraday, typically a month, only occasionally a year.

(8:10) So of the little research that households do, about a third of it is spent looking at price charts, not just literally prices or plots of prices. (8:20) And those price charts have very short look back windows. (8:22) So kind of the information that people do gather tends to be of rather short-lived nature.

(8:28) And I think a large part of the kind of financial education ought to be emphasizing the investment horizon of investors. (8:36) So for instance, someone who's investing for their retirement 10, 20, 30 years from hence, kind of has to focus on a time horizon of equivalent length. (8:47) I mean, there really isn't that much information to be gathered from the last month about an investment that has a horizon of 30 years.

(8:56) So there's kind of an incongruity in the type of information that people seek out with respect to the type of investment decision they are most likely making. (9:08) So I think definitely what comes out quite strongly from our data is this extreme focus on price paths and extreme focus on recent price paths, which we think for most investors is not really an important piece of information. (9:25) And by the same token, what would be a very important piece of information for an investor that has decided to invest in individual equities, that does potentially have a pretty concentrated portfolio, a very important first-order consideration for them from a financial portfolio optimization perspective is just the variance or the volatility of the stock that they are investing in.

(9:49) And in our data, we worked very hard to find evidence of these households looking at data on stock market volatility, on stock betas, and we found very little of it. (10:02) So the number of households that in fact sought out any sort of information about the volatility of a given stock was minimal. (10:11) I'm just going to look it up.

(10:14) It's something like a percent of the households. (10:17) It's for sure less than 5% of the households that ever directly seek out information about the volatility of a given investment. (10:25) So from the first principles of portfolio choice, trading off returns of a portfolio and its variance or volatility, from that perspective, there seems to be very little emphasis on these households, on the volatility of the portfolio.

(10:41) So I think, like you say, investor education really could do well to emphasize that aspect and put it top of mind of investors.

JEFFREY H SNYDER, BROADCAST RETIREMENT NETWORK

(10:53) Last question for you, Tom. (10:55) In terms of the data set, you looked at 2007. (11:00) That was before the 2008 financial crisis.

(11:03) Do you plan to look at a data set, maybe a little bit more, try to get your hands on, I should say, a data set a little more current because there's definitely some lessons learned. (11:15) I think we all learned about the market from 2008. (11:20) So my question to you is, is that probably the next iteration of your study?

TOOMAS LAARITS, NYU STERN SCHOOL OF BUSINESS

(11:25) Look, if we can get our hands on this data, we would love to study it in any year, comprehensively. (11:31) And if any reviewers have access to such data, please don't hesitate to reach out to us.

JEFFREY H SNYDER, BROADCAST RETIREMENT NETWORK

(11:36) Contact you. (11:37) Yeah, don't contact me, contact you.

TOOMAS LAARITS, NYU STERN SCHOOL OF BUSINESS

(11:39) You can find me online. (11:42) This type of data is harder and harder to come by, as we understand it. (11:46) So in many ways, that's probably the best we can do, but hopefully similar data will materialize.

(11:52) I will say, in terms of retail investor behavior, there are other data sets, kind of other ways of getting at it that allow us for a longer breadth time-wise. (12:05) And retail investor behavior kind of shows similar aspects in 2007, in 97, in 2017. (12:13) So there are some, you know, in data sets to span for longer times, there's a good amount of kind of congruity in how retail investors behave.

(12:21) So we think there is value in that data. (12:25) For sure, though, big events matter a lot for retail investor behavior. (12:30) That's something that, again, has been documented quite carefully and convincingly.

(12:33) Something like living through the global financial crisis, or living through the inflation of 21, 22, or living through the meme stock mania of 2020, 21. (12:43) Those kind of experiences seem to shape investor preferences quite strongly. (12:49) Little experiences that they've seen themselves.

(12:53) And again, from an investor education perspective, that's something that ought to be emphasized. (13:02) We have a great, tremendous wealth of data from financial markets. (13:06) Over 100 years of high-quality data of U.S. equity markets. (13:09) And again, an investor who's looking to invest for the next 30, 40 years. (13:14) Sure enough, they may have discovered something about themselves during the global financial crisis or during the COVID boom. (13:24) But really, a sensible thing for an investor to do is look at the broadest data available and make decisions based on that.

(13:33) Because looking forward, we never know what will be the big worries of the time. (13:38) And for a long-term investment, I find most helpful to keep in mind longer-term data. (13:47) And for sure, the news media, brokerage sites, the finance industry, collectively, for whatever reason, there's a tendency, of course, to focus on the most recent news.

(14:00) And that's very natural and has a role. (14:04) But I think for many investors, a long-horizon view is really what's called for.

JEFFREY H SNYDER, BROADCAST RETIREMENT NETWORK

(14:09) Well, I couldn't have said it better. (14:10) Past performance is not indicative of future results. (14:14) Tom, we're going to have to leave it there.

(14:15) Great study. (14:16) Keep up the great work. (14:17) And it's great to see you.

(14:18) Thanks so much for joining us. (14:19) We look forward to having you back on the program again very soon.

TOOMAS LAARITS, NYU STERN SCHOOL OF BUSINESS

(14:21) Thank you so much. (14:22) Thank you so much.

JEFFREY H SNYDER, BROADCAST RETIREMENT NETWORK

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(14:35) And we're backing in tomorrow for another edition of BRN. (14:37) Until then, I'm Jeff Snider. (14:38) Stay safe, keep on saving, and don't forget, roll with the changes.