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?