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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.

Classic Research: Can Individual Investors Consistently Excel?

We have selected for retrospective review a few all-time “best selling” research papers of the past few years from the General Financial Markets category of the Social Science Research Network (SSRN). Here we summarize the December 2002 paper entitled “Can Individual Investors Beat the Market?” (download count over 4,000) by Joshua Coval, David Hirshleifer and Tyler Shumway. This research investigates the persistence of outperformance and underperformance among individual investors/traders in stocks. Using data from a large discount broker on trades in 115,856 accounts during 1/90 through 11/96, they conclude that: Keep Reading

Individuals => Institutions: One-Way Flow?

In their January 2005 paper entitled “Who Loses from Trade? Evidence from Taiwan”, Brad Barber , Yi-Tsung Lee, Yu-Jane Liu and Terrance Odean investigate wealth transfer between individuals and institutions in financial markets. Using a complete common stock trading history of all investors in Taiwan (the 12th largest financial market in the world) for 1995-1999, they document that: Keep Reading

The Ghosts of Stocks Past

In their September 2004 paper entitled “Once Burned, Twice Shy: How Naive Learning and Counterfactuals Affect the Repurchase of Stocks Previously Sold”, Terrance Odean, Michal Strahilevitz and Brad Barber examine how past experience with a stock affects the average investor’s subsequent actions regarding that stock. Using trading records for 66,465 households at a large discount broker during 1991-1996 and 665,533 investors at a large retail broker during 1997-1999, they show that the average investor tends to: Keep Reading

Are Individuals Big Picture or Little Picture Traders?

In the April 2005 version of their paper entitled “One Trade at a Time: Narrow Framing and Stock Investment Decisions of Individual Investors”, Alok Kumar and Sonya Lim investigate whether individual traders take an optimizing big picture (How’s my portfolio doing?) or a suboptimizing little picture (How’s this stock doing?) approach to trading. Using a data on the portfolio holdings and trades of a sample of 41,039 individual investors (with demographics) at a large U.S. discount brokerage house during 1991-1996, they conclude that: Keep Reading

Investing Like an Optimist

In the May 2005 update of their paper entitled “Optimism and Economic Choice”, Manju Puri and David Robinson use data from the Survey of Consumer Finances (conducted every three years since 1989) to investigate the economic decisions of optimists, including financial portfolio construction. Defining optimism based on the mismatches between the life expectancies estimated by respondents for themselves and those indicated independently by actuarial tables (optimists expect to live longer than indicated actuarially), they find that: Keep Reading

Use the “Cone of Silence” When Buying Stocks?

In the June 2005 update of their paper entitled “All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors”, Brad Barber and Terrance Odean examine the behaviors of individuals and institutions regarding attention-grabbing stocks. Using four datasets spanning 1991-1999 and focus on three measures associated with attention grabbing events (news, unusual trading volume and extreme returns), they find that: Keep Reading

Market Orders Versus Limit Orders: Informed Traders Prefer…

In the October 2004 version of their working paper entitled “So What Orders Do Informed Traders Use?”, Ron Kaniel and Hong Liu apply the “probability of informed trading” measure to trading in 144 stocks around the end of 1990 to determine the trading habits of informed traders (those with private information related to asset valuation) regarding the use of market orders versus limit orders. They show that: Keep Reading

Easy Trader

It is very easy to: (1) set up an account with an online, discount broker; (2) get margin and option-trading privileges; (3) read about hot stocks and funds on the web; and, (4) start trading. Is this process too easy for the average investor? Keep Reading

Disagree with Me? Idiot! Liar! Basher! Pumper!

Thinking about stock message boards… Keep Reading

Feeling Pushed Around? Are Your $ in Jeopardy?

In case the market’s got you down… Keep Reading

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