Invest Time Before Money

Investors looking to place blame for their deteriorating portfolios and the troubles of the stock market need only look as far as themselves, according to a survey by InsightExpress.

Conducted online among 300 investors through early July, 2002, the survey revealed that 82 percent agree that it is their responsibility to conduct their own due diligence before making an investment decision, but many admit to not doing it.

Although three-quarters of all investors believe they can make wiser decisions with better information, they are not taking advantage of the resources they already have. Investors said their due diligence was deficient due to:

  • lack of time (33 percent)
  • complexity of conducting their own analyses (28 percent)
  • lack of trust in available information (25 percent)
  • published research reports are too complicated (24 percent)
  • key information is too hard to find (13 percent)
  • access to information is too expensive (10 percent)

Furthermore, the survey reports that investors are significantly deficient in conducting due diligence because they have unrealistic expectations for returns, and they are primarily focused upon an investment’s historical return and related company news when making investment decisions.

When asked about the amount of research they conduct before investing, 45 percent indicated that they contact a broker or investment advisor; 25 percent read a company’s annual report; 22 percent review a company’s peer group performance; 19 percent review buy/sell/hold ratings; 16 percent analyze financial statements; and 1 percent listen to company conference calls.

Even though many of the investors admit that their own research is deficient, only 17 percent feel that investors are to blame for the current financial crisis. Almost three-quarters (72 percent) feel that CEOs should bear the brunt of the blame; 71 percent feel it is the fault of accountants and auditors, and 67 percent lay the responsibility on company boards of directors.

“As companies report problems and the markets decline, there is an increasing trend for investors to blame everyone but themselves,” said Lee Smith, president of InsightExpress.

Additionally, the survey reveals that 71 percent of investors believe companies are purposefully withholding information from the public to maintain their stock price. And 3 out of 4 would like the government to step in and require greater disclosure and information accuracy.

Compounding these findings is similar information released by Schulman, Ronca & Bucuvalas, Inc. (SRBI) that comes as a result of interviews with 300 investors during the end of June 2002.

SRBI found that 71 percent of the respondents are not planning to invest additional dollars in the market in the next few months, and only 6 percent say that they have bailed out of any stocks and mutual funds because of the ongoing scandals involving Enron, Arthur Anderson, Adelphia Communications, WorldCom, Xerox and other companies.

As a result of the scandals, 61 percent report that the value of their portfolios has decreased during this period, with approximately 1 in 10 investors owning stocks in the companies involved.

The respondents to the SRBI survey also played the blame game for the financial scandals:

  • high-level corporate executives (80 percent)
  • corporate boards (53 percent)
  • accounting firms (51 percent)
  • President Bush (14 percent)
  • the U.S. Congress (17 percent)
  • the Clinton Administration (17 percent)
  • government agencies that regulate the securities markets (30 percent)

While 28 percent blame the brokerage firms for the scandals, 57 percent say that they have little (39 percent) or no (18 percent) confidence in the recommendations of brokerage firms.

However, investors that want to conduct their own research before buying shares have plenty of effective online resources, according to Gómez, Inc.

Gómez finds that some broker houses are pursuing ways to make their Web sites indispensable to both advisor-oriented investors and advisors themselves, revealing the following trends:

  • Investors who use online tools make more trades and hold more assets.
  • Satisfaction levels of tools remain low, compared with client expectations.
  • Existing tools are not optimized for Long-Term Investor and One-Stop Shopper profiles but are appropriate for the Web-Savvy Active Investor.
  • Tool abandonment is a function of usability, not complexity.
  • Discount brokerage offerings are driving industry best practices.

Dan Burke, Gómez’s Director of Brokerage Services says that full-services firms are seeking ways to seamlessly integrate advisors into the online investing process that reinforce their role as financial guide and confidant, while empowering more Internet-savvy investors to partake of lower-cost, online services.

Gómez notes that it is critical for online brokers to create better Web sites as transaction volumes have plummeted 40 percent from their historic highs of 18 months. Gómez estimates that there were 19.7 million active online accounts as of year-end 2001, up fractionally from year-end 2000.

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