Blog - Investing Notes

Blog Synthesis: Individual Investing

What does it take for an individual investor to survive and thrive while swimming with the institutional and hedge fund sharks in financial market waters? Is it better to be a slow-moving, unobtrusive bottom-feeder or a nimble remora sharing a shark's meal? Here is a listing of past blog entries on success and failure factors for individual investors.

Using Trailing Stop Losses to Reduce Risk ...over the long term, systematic use of stop losses in trading individual stocks does not enhance the level of returns, but certain trailing stop losses reduce trading risk (standard deviation of returns).

Do Stop Losses Work? ...systematic use of stop-loss orders may be beneficial, especially if one can project the general price trend and apply stop losses accordingly.

The Value of Financial Advisors? ...on a risk-adjusted basis, diverse groups of self-directed and advised investors perform about the same, with alphas close to zero.

Peer Pressure and Individual Investing Behavior ...individuals should carefully consider whether validated information or peer pressure is driving their investing/trading behaviors.

Using Leverage (While Young) to Beat the Market Over the Long Term ..."buy stocks using leverage when young." Diversifying stock investments over time by using leverage when young is very likely to generate greater wealth at retirement than either 100% constant allocation to stocks or traditional unleveraged stock/bond allocation algorithms.

Success for Collaborating Individual Active Traders? ...individual active traders on average may be able to beat the market when collaborating on trading methods and opportunities.

The Out-of-Country Experiences of Individual U.S. Investors ...international diversification as implemented by individual U.S. investors on average neither compensates for bad investing/trading practices nor dramatically enhances good ones. While sophisticated investors generally improve returns and (especially) reduce portfolio volatility via positions in foreign equity funds, underperforming investors tend to underutilize or misuse foreign holdings.

Do Some Individual Investors Consistently Outperform? ...some individual investors/traders do consistently earn economically significant abnormal returns.

Naive Investors: Illusions of Personal Past Performance ...individual investors/traders should be diligent and honest in assessing personal past performance if they want to learn from experience.

Evaluating "Retail" Investment Managers ...in the absence of equity investment manager performance data that demonstrates strong and persistent net outperformance of the broad market, individual investors are likely better off buying and holding low-cost index funds directly.

Recent Evidence on Individual Investor Performance ...it is very difficult for individual investors to beat the market. Infrequent trading and lower-risk holdings have been key to relative outperformance since 2000.

More Information is Better, Isn't It? ...individual investors should continually ask themselves whether their information gathering efforts support rational execution of new decisions, or merely feed overconfidence in past decisions.

How Investors Do (or Don't) Take Advice ...the difficulty of successful investing/trading probably makes many investors/traders underestimate their own knowledge/abilities and overestimate the knowledge/abilities of advisors.

Spam Spasms: This Stock Ready to Explode! ...investors/traders who take the advice of spam stock touts are likely to lose big and fast.

It's a Mad, Mad, Mad, Mad Market? ...the losers are the Mad Money viewers who buy recommended stocks at the open the next day. The winners are the market makers and arbitrageurs who sell the overpriced recommendations on day 1, and the traders who sell them on days 2 through 12.

The Odds of Winning as an Active Trader ...this evidence suggests that the average day trader breaks even and that the most active traders may be the most successful.

Diversification for "Peak" Performance ...diversification produces "peak" performance by collapsing the probability of performance around the mean. With it, you will seldom fly high, or crash and burn.

Investor/Trader Hurdles Successful investors and traders face three hurdles on the track to consistent success...

Why Not BRSVX Instead of IJS? ...we stick with the ETF because of the following little edges…

Who Reads Yahoo! Message Boards? ...most Yahoo! message board participants seem to be at home in multi-layered (fictional user name and ISP IP address) anonymity.

Stock Trading Wisdom in the Crowd of AI Software? There is not a lot of very recent research specifically testing AI for stock trading. That which we could find generally concludes that AI can generate abnormal returns.

Got a Winning Personality? ...investors/traders may want to consider how their personality traits dispose them toward or away from outperformance.

The Two Habits of Highly Effective Investors? ...the wealthiest investors exhibit studied risk-taking and efficient opportunity research.

Finding Memes for Contrarian or Trend-following Plays ...rapid meme detection via Internet-enabled technologies may offer an edge for tuned-in traders.

The Decline of Stock Picking? ...investors everywhere have increasingly embraced modern portfolio theory, emphasizing risk management (diversification) over stock picking. The best opportunities for (diligent) stock pickers are the stocks of young, small, obscure, foreign firms.

Can Individual Investors Consistently Excel? ...skillful individual investors exploit market inefficiencies to earn abnormal profits, above and beyond those available from well-known strategies based upon firm size, value or momentum.

Reader Question on a Market Forecasting Product We would not buy the product without a lot more information on actual, statistically meaningful trading results.

Individuals --> Institutions: One-Way Flow? ...individual investors are systematic stock trading losers; institutions, systematic winners. Individual investors may well be relatively overconfident (despite lack of investing education) and thrill-seeking compared to institutional investors.

Are Individuals Big Picture or Little Picture Traders? ...individual investors can look at their own trading patterns for clustering to assess whether they act like big picture or little picture traders.

Investing Like an Optimist ...stock pickers tend to be optimists who should focus on objectivity in assessing the outcomes of their stock picking.

Use the "Cone of Silence" When Buying Stocks? ...individual investors tend to limit buying consideration, detrimentally, to those stocks that grab their attention via unusual trading or other news.

Market Orders Versus Limit Orders: Informed Traders Prefer... ...informed traders prefer price certainty over execution certainty unless the value of their private information is about to expire.

Contrarians Versus Trend-followers: and, the Winner Is... ...commercial traders tend to be successful contrarians, and small speculators tend to be unsuccessful trend followers.

What It Takes to Drive the Big (Hedge Fund) Rigs... ...smart young (hedge fund) drivers wanted.

Easy Trader For some research guidance on being a truly independent investor/trader…

Feeling Pushed Around? Are Your $ in Jeopardy? In case the market's got you down…

Diversify(?), Diversify(?), Diversify(?) ...some risk-tolerant investors successfully exploit significant informational advantages by concentrating their portfolios in a few stocks that they know well.

The Lure of Trading? ...a high level of trading activity usually underperforms.

Do Day Traders Make Money? ...day trading is risky business. Practice and speed appear to be critical success factors.

In summary, individual investors can excel, but only with proactive preparation and intellectually and emotionally disciplined execution.