Sunday, February 27, 2011

Believe it or not.

Among tons of analysis reports available with or even without cost in the market, quality varies due to the experience, attitude, and even emotion of the analysts who wrote them. Investors are also divided into three groups. The first group chooses to solely believe in ratings, trend analysis or expected earnings shown on reports published from companies such as S&P. Another chooses to question all the material they see from reading. The last one tends to be in the middle of the previous two group, which means partially believe in analysis reports.

Though outliers exists, I can still imagine the rate of return is positively correlated with how much time an individual investor spends on his/her own analysis. Let's assume this is another factor that changes the result of an investment activity, just like beta or other variables we use in calculating expected return. By fixing the total amount of time an investor have for investing, the more he/she spends on reading and chooses to believe everything instead of double checking, the more volatile this factor will be, thus more uncertain the return will be.

Now do you feel wired because the consequences above tells you that bad things could happen to your investing account because you read more? Read it again and think about it, and you will find it DOES make sense.

There's no proof of this theory and it just came out of my random thoughts. Someone will argue that the effectiveness of reports published by large companies should at least have a log-normal distribution instead of normal, which means they won't at least make you loose money. Then why did investment companies who publish analysis reports couldn't prevent their clients loosing money back in a year ago?

Again, just some random thoughts. Welcome to comment.



  1. Hi Chang,
    I'd agree, in general it's not good common sense to just read info and soak it all up without some filtering.