Mums and dads might know best after all ::

Author: Simon Hoyle
Date: 12/04/2008
Words: 1086
Source: SMH
Publication: Sydney Morning Herald
Section: Business
Page: 51

Much-maligned retail investors may not be to blame for sharemarket chaos, writes Simon Hoyle. Retail share investors - the so-called "mum and dad" investors - don't have a great reputation for first of all making sound investment decisions and second, sticking with them.

Whenever there is a sharemarket rout, it is these investors who are held responsible for panicking and selling as the market falls. And when there is a sharemarket bubble, it is commonly held to be naive retail investors who are the bunnies buying in at the top, chasing the market to - and past - its peak.

But new research suggests that this may not be the case - and raises the prospect that the current "irrational volatility" (as the big broker CommSec describes it) may be due to institutional and allegedly sophisticated forces, not the oft-maligned mums and dads.

The research, conducted by Clime Asset Management, is comprehensive: an online questionnaire went out to more than 8000 individuals.

The respondents were people on Clime's database, which includes investors in Clime's managed funds and people who have attended workshops run by Clime's managing director, Roger Montgomery, for the Australian Securities Exchange, Securities Institute of Australia, Australian Investors Association and Australian Shareholders Association.

"They are investors already, I suspect - or are going to become investors very soon," Montgomery says.

The research sought to pinpoint how and why we invest in shares: the sources of information we use, and those we ignore, when making buying and selling decisions; how comprehensive and sophisticated the research is that we do before we decide to buy or sell; and the reasons we buy or sell shares in the first place.

The research reveals - not surprisingly - that not all of us are uniformly sophisticated. While a comforting number of us display a reasonable level of sophistication, knowledge and willingness to do our homework before buying or selling, there is still a significant proportion who do not - who are still looking for a short cut or treating the sharemarket more like a casino than a long-term wealth generation mechanism.

Some respondents admit to not knowing how to value a business before buying its shares, not doing any research at all before buying (a significant proportion said they bought shares - presumably in a float - because they feared "missing out") and not having a clear idea of why they bought the shares. The flipside of this final point is that some investors also do not have a clearly thought out plan or reason for selling, either.

Clime's Montgomery says the research has revealed some reassuring results. It seems most investors ignore extraneous sources of information, or "noise" as it is described. And a minority - less than 31 per cent - say they have bought shares simply because they had already gone up in value.

However, the overwhelming impression from the research is that the majority of retail investors have not been excessively spooked by the current sharemarket volatility. Less than half of us say we have sold shares just because they have fallen a long way from the price at which we bought them.

"In the face of volatility, people seem to have taken a realistic [view] and they are actually operating in a rational way," Montgomery says.

As a professional investor, Montgomery is a devotee of the hard slog, of doing often dull, but critical, fundamental research, crunching the numbers and understanding how a company works and the industry it operates in before committing his investors' money.

In Montgomery's opinion, three first-rate sources of information and insight into how well a company is tracking (or likely to perform) are: industry journals; a company's unlisted competitors; and its customers.

"Industry journals are probably the best [source]," Montgomery says. "They are usually written without stock promotion; it's about the industry and who in the industry is going well and who in the industry is going badly. So you get some sense of relative performance without the spruiking.

"Talking to unlisted competitors is going to give you an opinion without the stock promotion aspect.

"And customers will tell you whether the product that the company is producing or the service they are offering is something [the customer is] going to stick with for the long term, whether they are going to be repeat customers, and why."

The survey throws up some interesting findings on these sources: 82 per cent of investors never read an industry journal before they invest. But that is not to say investors do not read anything before they invest: 63.7 per cent of people have been influenced to buy shares after "reading an article in the media".

Montgomery says fundamental research is critical to learning how a company works and whether it is a potentially good investment. While access to unlisted competitors and customers might be beyond the reach of the average investor, there is still a wide range of sources investors can, and do, use.

For example, more than 70 per cent conduct online searches for anything in the media about the company in question. And more than 56 per cent of investors read annual reports as part of their research.

Montgomery queries whether they read enough. In a series of seminars and lectures he gave to an estimated 2000 people recently, when he asked how many had read five years' worth of annual reports, no one has raised a hand.

Almost three-quarters of investors do read analysts' reports - good news for analysts, but Montgomery wonders whether investors get the whole picture if they rely on only analysts' reports. For example, when was the last time an analyst issued a "sell" recommendation?

"I think a mistake individual investors can make is to take the 'buy', 'sell' and 'hold' recommendations literally, rather than seeing them as a relative ranking system," Montgomery says.

He says they should not be taken literally and often can't be.

"I've seen when an analyst upgrades a recommendation from a 'sell' to a 'hold'," Montgomery says. "How do you do that? You've sold them, how do you then hold them?"

Perhaps not surprisingly, the professional adviser most often consulted is a full-service broker - more than 45 per cent of people consult such professionals. But almost as many - 40 per cent - consult tip sheets. And both of these sources of advice are more popular than financial planners, whom only 30 per cent of respondents consult for advice.

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