Invest Like Thy Neighbor? We Do Already.
In the 1990’s tour-de-force that is Home Improvement, Tim "The Toolman" Taylor (deftly personified by Tim Allen) sought out the proven wisdom of his neighbor, Wilson, at the end of every episode to successfully help him work his way out of his latest familial predicament. In addition to launching the career of Pamela Anderson (likely, and sadly, my last reference to her on the Cake blog), the show made Wilson famous by never fully revealing his face. 
While we oftentimes maintain a tenuous relationship with our neighbors (see "Ugly Naked Guy" from that other seminal ’90’s sit-com Friends), we do rely on one another for real-world advice around some of our biggest life decisions, such as what cars we buy, where we send our kids to school, how much we sell our homes for, etc.
And, as it turns out, what stocks we decide to buy.
In a new study by Zoran Ivkovich and Scott J. Weisbenner, published in the July issue of The Review of Financial Studies, the professors find that when it comes to our portfolios, we pay a great deal of attention to what our neighbors are doing. Their conclusions are summarized in an article in the New York Times,
The likelihood that a
household would follow the lead of other investors was greatest when they lived
nearby. It tended to shrink quickly as the distance grew…
One possible cause of this pattern is that investors — by word of mouth, whether
over the garden fence or at the gym — learn which stocks their neighbors are
buying and then tend to favor those stocks themselves….The professors are careful to stress that your neighbors’ influence may have
some benefits. It may be that in an increasingly complex world, word of mouth is
an efficient, inexpensive way to find out about promising opportunities.
Over all, the professors concluded that “there is strong evidence that
individuals’ stock purchase decisions are related to those made by their
neighbors.”
At Cake, we have built our company around this idea of "social investing"- that individual investors are better off when we are allowed to objectively and safely compare, collaborate, and communicate with one another when it comes to our portfolios. And that by doing so, we can achieve better returns than by blindly buying the under-performing investment products that we are constantly marketed to consume. See my earlier posts here and here.
Cake aims to make it easier and more efficient to collaborate with other individual investors and take what we are already doing to the next level. Give it a try and let us know how it is working for you.
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Posted by: Steve Carpenter
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