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Chapter 13. Follow the Experts > Core of the Story

Core of the Story

Every discipline has its experts and the investing world has more than its share. Some investors like Warren Buffett and Peter Lynch earn their expert status by generating high returns on their portfolios over many years. Others become experts because of the positions they hold—market strategists for investment banks and equity research analysts, for example. Still others become experts because of what they know—insiders at companies and those close to decision makers. Finally, there are those that anoint themselves as experts in aspects of investing with nothing specific to back them up and because of their sales prowess, pull it off; they write books about successful investing and offer newsletters you can subscribe to. Why are novice investors so attracted to expert advice? A number of beliefs underlie this attraction:

  • Experts know more about markets and hence are less likely to make mistakes. Investing can be daunting, especially in today's markets, where choices abound and investments become increasingly complex. Investors worry about putting their pension funds and savings at risk by picking the wrong investment at the wrong time and assume that experts can steer them away from catastrophic mistakes.

  • Experts can bring more resources (data, models, people) to the stock selection process and hence can pick better investments. Individual investors are constrained in terms of how much time they can spend on analyzing investments and how many resources they can bring to the process. An equity research analyst at an investment bank or a portfolio manager at a mutual fund can bring more resources and more time to investment analysis, and presumably this pays off as better investment choices.

  • Experts have better access to private information (buzz, rumor, news) and hence get advance notice of big happenings. Markets move on information and investors with timely access to good information should be able to use that information to earn higher returns. While individual investors may not be able to talk to the managers of a firm, analysts have access to these highly placed sources. Many investors assume that information is leaked to Wall Street before it gets to Main Street.


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