Six Minutes?! Study Finds That Investors Often Skip Proper Stock Research

There isn’t much research on how individual investors actually research stocks. A big reason for this is the difficulty of tracking what individual investors look at. This is what makes a new study by the National Bureau of Economic Research (NBER) interesting. Researchers used browser data from 484 individual investors to see how they analyzed stocks.

The headline takeaway from the study is striking: The median investor spends just six minutes researching each stock they trade. I’ve often waited longer for my Starbucks order. Most of this research occurs right before hitting the buy button.

The median, by definition, is the point where half of all people spend six minutes or more on their stock research and half spend six minutes or less. The average investor spent 29 minutes per trade on research. This tells us that some investors barely did any research while others took their time to analyze their investment candidates.

Most of the research was conducted on Yahoo Finance. The study’s authors described it as being “by far the most popular finance research site.” (I suspect some of this popularity is because the browser data collected was from 2007.) Brokerage websites were a distant second. Investors spent a median of seven minutes researching on Yahoo Finance and less than one minute on brokerage websites. Less than 7% of investors visited the U.S. Securities and Exchange Commission’s (SEC) website.

When researching stocks, what did these individual investors actually look at? Snapshot pages (aka stock quote pages) and chart pages ranked at the top, with 93% of investors looking at them. Moving averages were commonly used for technical analysis. In terms of fundamental data, “almost 40% of investors [sought] out some sort of earnings information,” spending just under two minutes on average. More than half (53%) looked at other non-earnings data, but this was a “disparate” mix of information.

The study also reveals two distinct research styles: those who focus on "fast-moving" information like news and price charts (especially when trading speculative stocks), and those who dig into "slow-moving" fundamentals like earnings and dividends.

Of course, there’s no magic number for how much time should be spent researching a stock. How you identify ideas (e.g., quantitative filters like stock screens versus news headlines or social media influencers) and what you look at matters far more.

Here are some of the things I look at as part of my analysis process. Everything in this first group can be found on the AAII Stock Evaluator page. Just type in a company’s name or ticker symbol into the search box at the top of any page on AAII.com.

• Financial statements: Revenue and earnings growth, positive cash flow and a manageable level of debt are preferred.
• Financial ratios: Deteriorating gross and operating margins are concerning, as is a weak interest coverage ratio and/or a weak Altman Z double prime bankruptcy risk (Z) score.
• Earnings estimates: Recent positive surprises plus expectations by analysts for future growth with few negative revisions are desired.
• Valuation: If the price-earnings (P/E) ratio or other ratios are high, I will usually pass on the stock.
• Chart: High levels of volatility give me pause; a big price move that occurred within the past 12 to 24 months will prompt me to find out the reasons why.

Beyond using the AAII website, I also look at:

• Companies’ investor relations websites: Recent news, the latest earnings report, the latest presentations and dividend history (if applicable).
• The SEC’s EDGAR database: I particularly scan through the Form 10-K for any red flags I have missed.
• Earnings call transcripts: Seeking Alpha publishes these, as do other sites.
• Company news: There isn’t one single source for this; I use Dow Jones news sites, but it does come down to personal preference.

I can reach a decision to pass on a stock within minutes. I often form a favorable opinion about a stock within 10 minutes, though I will change my opinion if I uncover something that justifies it. The big key is turning over the right stones instead of just giving a stock a cursory glance.