Posted by: Ben Steverman on July 16, 2008
If you invest or trade in individual stocks, how much time do you spend on research before you buy?
Yesterday I was talking to Ron Sweet, the vice president of equity investments at asset manager USAA. After warning that this is a “perilous time” for individual investors, he advised: “You have to spend 40 or 50 hours on a stock to really know it.”
40 hours per stock and a 40 stock portfolio — that’s 1,600 hours. But you’d be foolish to buy all or even most of the stocks you get to know. The whole point of your research is to pick the winners from the losers. So if you’re talking about research on, say, 100 stocks, that adds up to at least 4,000 hours of research. That’s 77 hours per week!
Jim Cramer advises spending about an hour a week for each stock you own. I believe he advises investors have a smaller portfolio, but even if you have just ten stocks, that’s 10 hours every week. And you also should make plenty of time for scouting out new prospects. In his latest book, Cramer steers most people away from do-it-yourself investing. As I wrote in December: “To advise readers and viewers to trade short-term, Cramer says, is like telling them ‘you too can play in the NBA.’ A few might be able to do it, but the vast majority won’t.”
I would guess that most amateur stock pickers are not spending anywhere near the amount of time either Sweet or Cramer advise.
Much of the investing advice on the Internet seems designed to reassure investors that stock-picking is easy. Often they’re paired with some investing method (for sale in a book or over a web site) that offers effortless results.
A financial planner named C.C. Collins writes (in a post found several places on the web for some reason):
“The most successful investing methods should take most individuals no more than four or five hours per week and, for the majority of us, only one or two hours per week with little to no stress involved.”
One author, Phil Town, says you can invest in “just a few hours per week.”
Some part-time investors do spend a substantial amount of time.
For example, this individual investor named Brad spends as much as 15 to 20 hours per stock “collecting information, studying fundamentals and watching them over a period of time.” After that initial research, “maintaining and updating new information over time becomes quite routine.” A nurse, Brad says he spends far less time on his health care stocks, which he already understands well.
Brad’s method sounds like the most time an employed person could realistically spend on stock picking in their spare time. Do you think it’s enough? How much time is appropriate? Can a part-time investor ever match the time and resources that professionals can spend on equity research?
Another question: Does it matter how much time you spend? Or, as many mutual fund managers find, are you doomed to never outsmart the market over the long term anyway?