Individual Investing

Two recent papers investigate the genetics of individual investing. The September 2009 paper “Nature or Nurture: What Determines Investor Behavior?” by Amir Barnea, Henrik Cronqvist and Stephan Siegel examines the degree to which genetic makeup influences individual investing behavior. The July 2009 paper “IQ and Stock Market Participation” by Mark Grinblatt, Matti Keloharju and Juhani Linnainmaa explores the relationship between intelligence and individual investing. These studies conclude that: Keep Reading

According to the introduction at Collective2, the site “monitors over 8,920 trading systems. Whether you trade stocks, futures, forex, or options – you’ll find a trading strategy here… Think of us as an independent ‘trading system auditor.’ We’ll investigate which trading systems are profitable.” Additionally, Collective2 serves sellers (renters) of trading systems: “If you are an expert trader, or have developed a ‘black box’ system, you can earn income by making your trade signals available to C2’s over 32,000 registered users.” What can investors/traders learn about stock trading systems from the aggregate data compiled at Collective2? Using statistics available there for 193 active stock trading systems (as of 7/29/09) and some contemporaneous returns for the S&P 500 Index and the NASDAQ Composite Index, we find that: Keep Reading

Do individual investors who trade equity options do better or worse than those who do not? In their October 2008 paper entitled “Option Trading and Individual Investor Performance”, Rob Bauer, Mathijs Cosemans and Piet Eichholtz examine the impact of option trading on individual investor performance. Using all daily trades and end-of-month portfolio positions for 68,146 individual Dutch investors (41,880 who trade equities only and 26,266 who trade options at least once) over the period January 2000 to March 2006, they conclude that: Keep Reading

What kinds of returns do options traders actually achieve? In their January 2009 paper entitled “Investor Trading Behavior and Performances: Evidence from Taiwan Stock Index Options”, Bing Han, Yi-Tsung Lee and Yu-Jane Liu examine trading behavior and net returns for all traders of Taiwan stock index options. Using the complete record of transactions, orders and quotes for Taiwan stock index options during 2002-2005 (involving 238,303 individual investors, 1,076 domestic institutions, 50 foreign institutions and 29 market makers), they conclude that: Keep Reading

Do individuals tend to think critically about financial advisor recommendations, or blindly follow them? In the March 2009 article entitled “Expert Financial Advice Neurobiologically ‘Offloads’ Financial Decision-Making under Risk”, Jan Engelmann, Monica Capra, Charles Noussair and Gregory Berns investigate the neurobiological basis of the influence of expert advice on financial decisions via functional Magnetic Resonance Imaging monitoring of individuals choosing between a certain payment and a lottery, with and without expert advice. Using test results for 24 individuals (mostly female and mostly undergraduate students), they conclude that: Keep Reading

Do stock traders learn rationally from past trading experience? In the March 2009 version of their paper entitled “Trading and Learning: How Different Are Different Categories of Investors?”, Sankar De, Vishal Mangla, P. Bhimasankaram and Simran Singh investigate how different categories of traders revise their beliefs about the prospects for future trading success in response to past trading experiences. Using a sample of 124 million transactions on the National Stock Exchange of India within 1.2 million accounts over the period April 2006 through June 2006, they conclude that: Keep Reading

How do financial advisors affect the investing practices of individual investors? Does their advice decisively improve client performance, or are other factors more explanatory? In their February 2009 paper entitled “The Influence of Financial Advisors on Household Portfolios: A Study on Private Investors Switching to Financial Advice”, Ralf Gerhardt and Andreas Hackethal compare the portfolios and transactions of advised and non-advised German investors to determine the effects of advice. They further decompose the sample of investors to explore whether differences between advised and non-advised arise from the advice per se or from investor socio-demographics or trading frequency. Using portfolio compositions and transactions for over 65,000 German investors during February 2006 through July 2007, including 597 who initiated a relationship with a financial advisor during that period, they conclude that: Keep Reading

Do hedge fund investors actually receive the returns reported for hedge funds, or does the timing of investments in these funds substantially affect experienced returns? In the March 2009 version of their paper entitled “Higher Risk, Lower Returns: What Hedge Fund Investors Really Earn”, Ilia Dichev and Gwen Yu measure actual hedge fund investor returns by integrating the returns of the funds they hold with the timing and magnitude of their capital flows into and out of these funds. Specifically, they calculate an aggregate internal rate of return (dollar-weighted return) that treats funds as time-ordered investor capital flows, with initial fund market value and fund inflows counted as negative flows and fund outflows and ending market value counted as positive flows. Using monthly net-of-fee return and assets under management data for a large sample of hedge funds over the period 1980-2006, they conclude that: Keep Reading

Who wins and who loses among equity investors, and why? In the December 2008 version of their paper entitled “Who Win and Who Lose Among Individual Investors?”, Kingsley Fong, David Gallagher and Adrian Lee compare the trading performances of three investor groups, those trading through: (1) institutional brokers; (2) discount retail brokers; and, (3) non-discount retail brokers. They define discount brokers as those offering trading services but no in-house research. They compare performances of these groups based on raw and risk-adjusted trading returns at the close on the trade date and at horizons of 1, 10, 25, 140 and 254 trading days. Using detailed intraday trading records for the Australian stock market spanning February 19, 1990 to December 1, 2005, they conclude that: Keep Reading

Do individuals who use investment advisors achieve higher returns than those who do not? Two closely related papers entitled “Investment Advice and Individual Investor Portfolio Performance” of January 2009 by Marc Kramer and “The Impact of Financial Advisors on Individual Investor Portfolio Performance” of March 2012 by Marc Kramer and Robert Lensink address this question. Using monthly portfolio returns for thousands of advised and self-directed individual Dutch investors during April 2003 through August 2007 (52 months), they conclude that: Keep Reading