Act Globally...But Don't Invest Locally?

Posted by: Lauren Young on March 28, 2007

Move over Peter Lynch.

A new study from the University of California, Berkeley’s Haas School of Business shows that “investing in what you know” doesn’t appear to hold true for individual investors.

In a study of almost one million transactions from more than 43,000 households, Haas Assistant Professor Mark Seasholes investigated whether investors who buy stocks of local companies have superior information. He found that individuals who buy local stocks fail to outperform the stock market, suggesting that these investors had no superior information about the companies.

Seasholes, who co-authored a working paper with Ning Zhu of the University of California, Davis, found that the typical investor overweights local stocks and has approximately 30% of his or her holdings in stocks located within a 250-mile radius of home. That represents a disproportionately large amount in local holdings given that on average, only 12% of companies on the stock market are headquartered within the same radius.

Based on their findings, the authors discourage investors from buying individual stocks at all and instead suggest index funds.

Interesting findings. Actually, the few stocks I own are stocks my father bought for me when I was a child, and they’ve done quite well. (We are from the Philadelphia area, so I own a few local utilities in my personal account.)

Which local companies do you own—and how have they fared?

Reader Comments

Mark

March 28, 2007 9:14 PM

I always intrepreted "invest in what you know" as invest in companies that you have at least some knowledge of what they do and how they do it. Not that it was a local company.
Based on "invest local" what would the people in Fargo do?

Going Like Sixty

March 29, 2007 9:34 AM

Investing in what you know doesn't mean buying stocks of local companies, it means buying stock only if you have studied the company or have knowledge from experience, and you understand what they do.

My stock list is here:
http://goinglikesixty.wordpress.com/2007/03/28/business-week-xer-misses-investing-strategy/

CrossProfit

April 7, 2007 9:56 AM

Investing in the market over the past three years should have produced positive results for most. In an up market, picking 10 stocks at random would result in 7 doing well. Utilities have been doing well since 02/2006. Will they continue doing well or not is another story.

See: http://www.crossprofit.com/article.asp?id=21

The question should be is how well did your portfolio perform in 2006 and in the first quarter of 2007. Is it up 20%, 50% or 70%? Your father should have told you that 'well' is a relative issue (pun intended).

Disclosure: This comment was written by a CrossProfit analyst and may not reflect the opinion of CrossProfit.com.
http://www.crossprofit.com

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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