Security Selection Factors: Novice versus Experienced Investors

ABSTRACTIn this study, we examine the differences in the factors perceived to be significant in the security selection process between novice and experienced investors. We apply the direct inquiry approach to two distinct groups: One group is composed of students enrolled in traditional face-to-face introductory investments classes, while the other group consists of students enrolled in the online sections of the same course. The online students tend to be generally older part-time students with greater investment experience. Based on their prior investment experience, we further break both face-to-face and online samples into two cleaner sub-samples of novice and experienced investors. We find that the novice face-to-face students tend to select variables with non-financial but firm-specific characteristics, while the novice online students select technical analysis type variables as most relevant. For the experienced students, the face-to-face classes are more similar to the online classes in their pre-course selection of variables. Both face-to-face and online experienced students identify technical analysis as well as fundamental analysis characteristics as important. The post-course survey shows that the face-to-face and online students overlap more in their highest-ranking variables compared to the pre-course survey, irrespective of their prior investment experience.JEL: G02, G11KEYWORDS: Investment Factors, Security Selection, Individual Investors, Experienced Investors, Novice InvestorsINTRODUCTIONThe investment decision-making process of investors has long been a source of interest to academic researchers. A puzzling question has been "What are the factors or variables that investors consider or perceive to be relevant in the selection of securities?" As the number of studies of investor behavior has grown, it is evident that there are various types of investors and there may be segmentation in their behavior based on their type and sub-type. For example, we have institutional investors and individual investors. This study focuses on individual investors, some of whom are experienced and others novices, along the lines of earlier studies such as that of Nagy and Obenberger (1994) and Merikas, Merikas, Vozikis, and Prasad (2004) on experienced investors, and Prasad, Freund, and Andrews (2010) on novice investors. This study expands on these studies by using a common investor cohort: students enrolled in introductory investments classes. The advantage of this common cohort is that it allows us to examine the perceptions of both experienced investors and novice investors using a more comparable common base. Further, it also allows us to examine the changes in their perceptions as formal education indirectly adds to their experience as discussed below.One objective of an introductory investments course is to introduce students to the variables or factors that investors consider in security selection. This decision process requires consideration of both firm-specific and market-wide variables. Investors assign some level of importance to these factors and use them to make an investment choice. In a typical investment course, a considerable amount of time is devoted to stock selection techniques, which requires an introduction to fundamental and technical analysis, the efficient market hypothesis, behavioral finance, portfolio theory, and asset valuation. These topics also appear in the financial media, so students may already have a preconceived notion of the relevant factors for stock selection. During the course, they learn some of the theories and empirical evidence that supports or dispels the relative merits of these techniques.Asset valuation follows from modern finance and economic theory: Individual investors are rational and maximize their expected utility. Another justification for valuation is based on the idea that arbitrage conditions should not prevail. For the most part, these theories assume a fair degree of market efficiency; however, both fundamental and technical analysis requires at least a temporary suspension of market efficiency. …