Blog - Investing Notes
August 10, 2007 - Do Some Individual
Investors Consistently Outperform?
Is individual investing an inevitable series of randomly spaced ups
and downs, or do some investors persistently enjoy more success than
others? In their August 2007 paper entitled "Performance
Persistence of Individual Investors", Limei Che, Øyvind Norli
and Richard Priestley investigate performance persistence among individual
stock market investors/traders. Using monthly stock portfolio data for
all individual investors who traded at least six times every 24 months
on the Oslo Stock Exchange during January 1993 through June 2003 (65,848
investors), they find that:
- Returns for individual investors systematically decrease as the
number of trades increases. Frequent traders tend to invest in small,
risky stocks. They actually outperform in rising markets, but they
suffer very large losses in down markets (almost double those of infrequent
traders).
- Individuals that have done well (poorly) over the past two to five
years continue to outperform (underperform) significantly on average
for as long as the next three years. This persistence is robust to
the method of past performance measurement, trading frequency and
size of account.
- Individuals in the top 10% of past performers earn average abnormal
(adjusted for size
and momentum
effects) monthly returns starting at 7.85% after one month and falling
gradually to 5.20% after 36 months. In sharp contrast, the bottom
10% of past performers earn average abnormal monthly returns starting
at -1.70% after one month and falling to -2.76% after three months
before increasing steadily to less negative values at longer horizons.
- A portfolio of stocks favored by the top 10% of past performers
(held by twice as many top performers as bottom performers) generates
a statistically significant monthly alpha
of between 0.72% and 1.25% depending on holding period. A portfolio
of stocks favored by the bottom 10% performers (held by twice as many
bottom performers as top performers) has an alpha that is close to
zero.
In summary, some individual investors/traders do consistently earn
economically significant abnormal returns.
For related research, see Blog
Synthesis: Individual Investing. See especially our blog
entry of 10/31/05 on a similar study.
