By Mark Hulbert

Individual investors are impulse buyers.

The median investor, often drawn to a stock because it's in the news, spends just six minutes of research before buying that stock, according to a new study by finance professors Toomas Laarits and Jeffrey Wurgler at New York University's Stern School of Business. And the bulk of that already-short research time is devoted to perusing a price chart of the stock's recent performance -- and often just the current day's trading session.

Note that six minutes applies to the median investor, so not all investors are impulsive. "A minority of investors do rather deep dives before trading a stock," Wurgler says. "But a much larger pool of investors spends virtually no time at all researching a stock before buying it."

The new research shows how far some individuals deviate from the assumption that economists make about investors behaving rationally. While it may not be surprising to learn that many investors act impulsively, the study shows how little time many spend on research before buying a stock and what these investors pay attention to in that short window.

If investors were rational, Wurgler says, at a minimum they would purchase a stock only after analyzing its risk statistics such as volatility. Such basic research would "be especially important if their portfolios were undiversified," he adds, which is often the case with individual investors.

The research breakdown

Wurgler and Laarits estimate that, before buying a stock, the median individual investor spends just 1% of the overall research time -- about six seconds -- examining its risk statistics. And just 14% of research time is devoted to analyzing the underlying company's earnings, dividends and other fundamentals.

Instead, most of the time that investors spend researching a stock focuses on a price chart of its recent performance -- and 73% of price-chart views look back only one day or even less.

The professors reached their conclusions by studying a database of what's known as "clickstream data." This database contained the complete browser history of a broadly representative group of several hundred individual investors, enabling the researchers to determine the webpages each investor visited, in what order and for how long before making a trade. The professors analyzed more than eight million clicks and 60,000 hours of internet use.

While it's possible an investor's information about a stock might have come from sources other than the internet, Wurgler said he thinks this is unlikely, for two reasons. First, because the internet provides free and near-real-time access to almost all relevant stock-picking variables, it is "the obvious venue for stock research for individual investors."

Second, "if an investor were nevertheless relying heavily on unobserved information, we might not expect a sudden burst of [internet] research on that stock prior to the trade, but it turns out that is often what we observe."

What can be done

Since picking stocks that on average will beat the market is notoriously difficult, even for Wall Street managers whose full-time job is to select such stocks, it would be going too far to predict that individual investors on average would beat the market if they spent more time researching stocks before making a trade.

But it's nevertheless likely they would improve their performance by not acting impulsively, says Terrance Odean, a finance professor at the Haas School of Business at the University of California, Berkeley, who has extensively studied the behavior of individual retail investors.

Odean adds that it takes a lot longer than six minutes to rank a large universe of potential stocks for purchase. It's therefore understandable that, when faced with this overwhelming task, "investors manage the problem by limiting their search to the handful of stocks that have recently caught their attention."

Odean said his research shows that, in large part because of this practice, the average stock that individual investors purchase underperforms the average stock that they sell. "Attention-driven buying patterns do not generate superior returns," he says. "While most investors would benefit from trading less actively, those who are determined to trade should avoid doing so impulsively."

A big reason for the lagging returns is that investors tend to overpay for the average stock that is in the news, says Nardin Baker, chief quantitative analyst at Massachusetts-based Wise Responder and a co-author of some of the first academic studies to find that high-attention stocks in the news typically underperform.

"Stocks that perform the best are often so boring and uninteresting that few if any Wall Street analysts or journalists are drawn to write about them," Baker says. "Investors end up paying a premium for stocks with exciting stories."

Mark Hulbert is a columnist whose Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at reports@wsj.com.

(END) Dow Jones Newswires

May 03, 2025 10:00 ET (14:00 GMT)

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