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? These blog entries cover success and failure factors for individual investors.
John Bogle Updates His Beliefs Last Updated: December 9, 2009
In his 2009 book Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition, author John Bogle has “not altered a single word of the original edition, but [has] chosen instead to update its voluminous data, and to comment on significant developments that have occurred since then…”, [trying his] “best to be candid in describing occasions when experience confirmed [his] insights of a decade ago, and when experience failed to do so…” One significant development over the past decade is the growing availability and diversity of Exchange-Traded Funds (ETF) as substitutes for mutual funds. Some notable reflections from the book are: More…
Art and Stocks November 13, 2009
How do prices for art relate to prices for equities? Does art underperform or outperform stocks over the long run? In their November 2009 paper entitled “Art and Money”, William Goetzmann, Luc Renneboog and Christophe Spaenjers investigate relationships between equity prices and art prices and between incomes and art prices. To enable their analysis, they construct an art price index spanning 1765-2007. Since art price data draws heavily on sales in Great Britain, they focus on the British equity market and incomes. Using their art price index, a British equity market index and GDP data for 1830-2007 and British income data for 1908-2007, they conclude that: More…
Stock Picking for Individual Investors? September 28, 2009
A reader asked: “It seems that the strategies you identify as possibly working for individual investors involve infrequently rebalanced holdings of exchange-traded funds rather than specific stocks. Are there any stock-picking strategies that individuals can use to outperform the market?” More…
You Should Expand into Research on Investing in Real Estate September 12, 2009
A reader suggested: “I’m an active real estate investor (private lending and passive income single and multi-family properties) and I sure wish I could find this kind of site for real estate investors. You all should venture out.” More…
Genetics of Investing (Not Algorithms) September 4, 2009
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: More…
AAII Stock Screens August 25, 2009
A reader asked:
“The American Association of Individual Investors (AAII) has a lot of strategies they have been paper-trading over the the last 11 years at AAII StockScreens. Have you ever done an evaluation of those performance results? It seem like every strategy builds upon a well-known investing book or otherwise publicized strategy from the last 40 years.”
According to the AAII StockScreens “GettingStarted” introduction, the purpose of these screens “is to provide…access to a wide range of investment approaches. Some approaches follow the methods of well-know professionals, and allow you to implement their ‘style of investing,’ while other approaches implement time-tested techniques used to identify attractive stocks. These approaches run the full spectrum, from those that are value-based to those that focus primarily on growth. Some approaches are geared toward large-company stocks, while others uncover micro-sized firms. Most fall somewhere in the middle.” AAII provides descriptions, characteristics and performance statistics for the screens. What can investors/traders learn from this collection of investment approaches? Using monthly performance statistics for the 59 screening approaches and for various potential benchmarks during the 139 months spanning January 1998 through July 2009 (available from AAII via download), we find that: More…
Collective2, a Marketplace of Trading Systems July 31, 2009
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: More…
Options Detrimental to Individual Investor Health? April 24, 2009
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: More…
Actual Index Options Trading Results April 23, 2009
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: More…
Critically Delegating, or Fearfully Abrogating? March 31, 2009
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: More…
