Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for December 2020 (Preliminary)

Momentum Investing Strategy (Strategy Overview)

Allocations for December 2020 (Preliminary)
1st ETF 2nd ETF 3rd ETF

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.

Active Beats Buy-and-Hold?

Do individuals who actively reallocate funds within their pension accounts outperform passive counterparts? In the March 2014 update of their paper entitled “Individual Investor Activity and Performance”, Magnus Dahlquist, Jose Vicente Martinez and Paul Soderlind examine the activity and performance of individual participants in Sweden’s Premium Pension System. This system allows individual participants to reallocate among available mutual funds on a daily basis with no switching fees/impediments. Information about the 1,230 funds offered during the sample period includes type (fixed income, balanced, life-cycle and equity), return and risk measured at several horizons, fee and major holdings. Most are equity funds, about half of which invest primarily in international equities. The government assigns individuals who make no choice to a default fund. Using daily net returns, fund trades and demographics for 70,755 individuals (from a random draw of individuals in the system over the entire period) and contemporaneous returns for several benchmarks during September 2000 through May 2010, they find that: Keep Reading

Technical Analysis a Drag?

Does technical analysis boost or depress performance for individual investors? In their February 2014 paper entitled “Technical Analysis and Individual Investors”, Arvid Hoffmann and Hersh Shefrin combine actual trading histories and results of a survey to investigate the use of technical analysis by individual investors. The 2006 survey solicits objectives, strategies and traits from a large group of individual clients of an online Dutch discount broker. The survey explicitly asks about use technical analysis and/or fundamental analysis. The authors use actual trading records to measure individual investment performance. Using 5500 survey responses matched to detailed trading histories spanning January 2000 through March 2006, they find that: Keep Reading

Two Self-destructive Individual Investor Behaviors

What individual investment behaviors are worst? In their January 2014 paper entitled “Which Investment Behaviors Really Matter for Individual Investors?”, Joachim Weber, Steffen Meyer, Benjamin Loos and Andreas Hackethal investigate relationships between the following ten tendencies of individual investors and portfolio performance:

  1. Portfolio turnover: unprogrammed trading volume scaled by portfolio value.
  2. Trade clustering: clustering of investor trades in time.
  3. Disposition effect: selling of winners and holding of losers.
  4. Leading turnover: trading before other investors (same security/same direction).
  5. Forecasting skill: systematically realizing excess returns on purchased securities.
  6. Trend following: buying funds with recent increases in value.
  7. Home bias: preference for German stocks or Germany-focused funds.
  8. Local bias: preference for stocks/funds with nearby headquarters.
  9. Lottery mentality: preference for stocks with low price and high idiosyncratic volatility/skewness.
  10. Under-diversification: holding only a few securities and/or highly correlated securities.

Using trading records, monthly position statements and demographics for 5,000 predominantly German individual investors who use a discount broker spanning January 1999 through November 2011, they find that: Keep Reading

An Edge for Attentive Traders After Hours?

Can investors quickly exploit surprising after-hours firm earnings/revenue announcements by trading after hours? In the January 2014 version of his paper entitled “Slow Price Adjustment to Public News in After-Hours Trading”, Jiasun Li investigates after-hours (4:00 pm to 8:00 pm) responses of stock prices to surprising after-hours quarterly earnings announcements. He defines a positive (negative) surprise as neither revenue nor earnings below (above) consensus estimates and at least one of them above (below). He specifies a trading strategy that buys (sells) positive (negative) surprises and holds to the end of after-hours trading. He examines delays between earnings announcement and trade initiation of up to 15 minutes. He calculates returns with actual trade prices, taking into account effective bid-ask spreads. Using (cleaned) tick-by-tick after-hours stock price data for 5,881 surprising after-hours announcements associated with reasonably liquid trading during 2002 through 2012, he finds that: Keep Reading

A Few Notes on Get Rich Carefully

In the introduction to his 2013 book entitled Get Rich Carefully, television personality and former hedge fund manger Jim Cramer describes it as: “…tailored for those who are befuddled about and distrustful of stocks but seek better returns than they’ve gotten from somnambulant managers and underperforming mutual funds. It’s meant for those who think they can profit from stock price gyrations but don’t know how and why stocks really go up and down. …Bond funds have gone from cautious friends to reckless, wily enemies. Real estate seems played out, gold stymied, commodities kaput. But stocks? Let’s go figure them out. Let’s go harness them together. Let’s go get rich with them, carefully this time, so you don’t have to give it back. Let’s go forward and makes some hay, because at last the sun is shining, and we have the tools to harvest the money that’s within our grasp after years of toiling in the most barren of vineyards.” Based on his experiences over the past eight years and his consequent rethinking of how stocks work nowhe concludes that: Keep Reading

Success Factors for Individual Stock Pickers

Which individual stock pickers beat the market? In their September 2013 paper entitled “The Information Content of Investors’ Expectations for Risk and Return”, Thomas Berry and Keith Jacks Gamble examine the performance of the most recent stock picks of members of the American Association of Individual Investors (AAII) who participated in an online survey. They issued the invitation to participate on June 15, 2011 and collected responses over the next two weeks. Questions solicited demographic data, level of investment experience (excellent, good or limited) and information about the participant’s most recent stock purchase. They exclude responses naming non-U.S. stocks and stocks priced below $5. They measure returns to various cross-sectional portfolios of these stocks over the next six months based on initial equal weighting. They adjust returns for market, size, book-to-market ratio and momentum factors to measure portfolio alphas. Reported returns exclude trading frictions. Using 2,218 survey responses and monthly returns for purchased stocks and risk factors during July 2011 through December 2011, they find that: Keep Reading

A Few Notes on The Alternative Answer

In the introduction to his 2013 book entitled The Alternative Answer: The Nontraditional Investments That Drive the World’s Best-Performing Portfolios, author Bob Rice (Alternative Investment Editor at Bloomberg Television) states that his: “…basic approach is an adaptation of the strategic asset allocation model that endowments have used for years, one that reflects two critical modifications. First, there is great focus on liquidity and inflation-protected income. Second, it incorporates the latest analysis regarding portfolio construction, specifically regarding accumulation of risk premiums and avoidance of cross-asset vulnerabilities. …Modern investors need modern tools. And they exist; it’s just that there’s been no reliable user’s guide. Now, I hope, there is.” Based on the practices of selected “elite” investors, he concludes that: Keep Reading

A Few Notes on Happy Money

In the prologue of their 2013 book entitled Happy Money: The Science of Smarter Spending, authors Elizabeth Dunn and Michael Norton state: “When it comes to increasing the amount of money they have, most people recognize that relying on their own intuition is insufficient, spawning an entire industry of financial advisors. But when it comes to spending that money, people are often content to rely on their hunches about what will make them happy. And yet, if human happiness is even half as complicated as the stock market, there is little reason to assume that intuition provides a sufficient guide. …trying to uncover the causes of your own happiness through introspection is like trying to perform your own heart transplant. You have some idea of what needs to be done, but a surgical expert would come in handy. Consider us your surgical experts.” Making liberal use of anecdotes to illustrate findings from an array of happiness research projects, they conclude that: Keep Reading

A Few Notes on How to Buy Real Estate Overseas

Kathleen Peddicord, publisher of the Live and Invest Overseas group, opens her 2013 book, How to Buy Real Estate Overseas, by stating: “The idea of diversifying your investments, your assets, your life and your future overseas can seem frightening, intimidating, even paralyzing. Could you really do it? Yes, you could. I say that based on 30 years of experience at this.” The book takes the perspective of a U.S. citizen seeking to diversify assets via direct ownership of non-U.S. real estate. Using examples based on her experience investing in real estate in 20 countries and operating businesses in seven, she concludes that: Keep Reading

Individual Investor Learning

What lessons do individual investors learn as they gain experience? In their November 2012 paper entitled “Do Stock Traders Learn From Experience? Evidence from an Emerging Market”, John Campbell, Tarun Ramadorai and Benjamin Ranish examine the evolution of performance and trading behaviors with experience among individual investors in Indian stocks. The Indian market has a rapidly growing investor base with direct equity ownership prevalent . Based on data available, they focus on relationships between account age and portfolio changes. Using random samples of monthly data for individual Indian accounts during 2002 through 2011, they find that: Keep Reading

Daily Email Updates
Filter Research
  • Research Categories (select one or more)