By Michael Hill
Every day investors spend billions of dollars buying shares of companies, and every day countless investors settle on available stocks instead of searching for the best options, according to a new study in the Review of Finance.
“People, for the most part, when it comes to researching stocks, they ‘satisfice,'” said Seton Hall University Stillman School of Business Finance Professor Scott Rothbort.
Rothbort is one of the study’s authors. He says the advent of the internet brought about many more do-it-yourself investors and when they go online to invest, the stocks are in alphabetical order. Rothbort says the study shows that “early alphabet stocks are traded more frequently than later alphabet stocks.”
“I think laziness comes in to it. It’s not necessarily a conscious laziness, but it’s a subconscious laziness. It’s behavioral laziness,” Rothbort said.
Rothbort says with all the stocks available, research fatigue is a factor and so is an investor’s time.
He says he and the other authors were so convinced of their hypothesis that they even tried to disprove it by taking the most popular stock out of the equation.
“Let’s take Apple out of the equation and see if the phenomenon still exists. And it indeed did. And then we took out some other well-known, popular stocks that begin with A or B to make sure that there wasn’t a particular stock that may have skewed the results and indeed one particular stock didn’t skew the results,” he said.
His takeaway for individual investors: “They either need to do more homework or maybe they should go to the professional who’s doing all that homework for them. Look, it’s very simple. You wouldn’t represent yourself in court if you had to. You wouldn’t drill your own tooth if you had a cavity.”
And the advice to publicly traded companies?
“One of our findings was that companies higher up in the alphabet trade more frequently and also have higher valuations. So if you have a company that’s languishing down there in the R, S, Ts, down in the bottom of the alphabet and you want to try to get some better valuation, maybe it wouldn’t hurt to actually change your name,” Rothbort said.
The study authors say they found stock trading habits similar to the old days of looking for something in the Yellow Pages phone books — the companies at the beginning of the alphabet got the most calls.