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Fledgling traders should lean on experts for investing tips, study shows

Jan Dennis, Business & Law Editor
217-333-0568; jdennis@illinois.edu

Released 9/20/2007

Photo of professors W. Brooke Elliott and Kevin Jackson
Click photo to enlarge
Photo by L. Brian Stauffer
Illinois professors of accountancy W. Brooke Elliott and Kevin Jackson surveyed non-professional investors to see what strategies they use when investing and what works. Their study showed that novice traders should lean on experts until they have enough experience to tackle raw data on their own.

CHAMPAIGN, Ill. — Novice investors earn lower stock returns when they seek an edge by wading through complex financial data rather than relying on experts to guide them, a new study by two University of Illinois professors shows.

Fledgling traders often overestimate their market savvy, thinking they can glean investment fodder that analysts overlooked in statistic-filled corporate and government filings, said W. Brooke Elliott, a professor of accountancy who has studied investing since 2001.

Elliott says some ordinary investors have enough skills to turn the reams of raw data into higher returns. Those who don’t are better off using analyst research to make buying and selling decisions, said Elliott, who co-wrote the study with accountancy professor Kevin Jackson.

“There’s a mismatch when you use information that you really don’t have the ability to use,” said Elliott, whose study will be published next year in Contemporary Accounting Research, a leading academic journal. “You’ll earn lower portfolio returns than you would have had if you had just relied on an expert’s report.”

Elliott said the survey of more than 400 average, non-professional investors shows experience ultimately helps some traders increase earnings by sifting through complicated corporate reports and U.S. Securities and Exchange Commission filings.

“Around six years, you start to see some improvement. We think they likely develop expertise in terms of the types of strategy they want to execute. And I think they just become more familiar with the financial reports,” Elliott said.

Elliott and Jackson say they aren’t surprised by overconfidence among investors, especially those who have an accounting or finance background.

“They probably feel that in order to do as well that they should use the same information as professional analysts,” Jackson said. “I think people have a tendency to see what the professionals do and try to mimic it.”

Jackson, who has studied investing since 2003, says he hopes the survey convinces novice traders to be honest with themselves and lean on experts until they have enough experience to tackle raw data on their own.

“It does kind of surprise me that in the face of being at a disadvantage in using certain types of information that they still use that information as much as the professionals who benefit from it,” Jackson said.

Elliott said investors likely are best served by a combination of careful research and patience as they learn the ins and outs of trading on Wall Street.

“You can read a book about golf, but unless you go out and play you’re not going to be very good,” Elliott said. “The opposite is true as well. You can’t just grab some random club and step on the first tee. But I think a lot of times investors do one or the other.”

Editor’s note: To reach W. Brooke Elliott, call 217-333-9247; e-mail wbe@illinois.edu.

To reach Kevin Jackson, call 217-244-0532; e-mail kjack@illinois.edu.