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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.

Individual Investor Performance by Motive and Method

What motives and methods of individual investors enhance performance? In their June 2010 paper entitled “Behavioral Portfolio Analysis of Individual Investors”, Arvid Hoffmann, Hersh Shefrin and Joost Pennings analyze how systematic differences in investor objectives and strategies impact the portfolios they select and the returns they earn. Using 5,500 responses from a 2006 survey of individual account holders at an online broker in the Netherlands matched to detailed trading activity during January 2000 through March 2006, they conclude that: Keep Reading

Investors Playing the Lottery Instead?

How much individual investing is lottery-like, just hoping for a big score with no analysis? In their June 2010 paper entitled “Natural Experiments on Individual Trading: Substitution Effect Between Stock and Lottery”, Xiaohui Gao and Tse-Chun Lin relate individual trading activity to national lottery jackpot size in Taiwan. Using twice-weekly lottery jackpots and contemporaneous Taiwan Stock Exchange individual trading data at the market and firm levels spanning 2002-2009 (1,495 lottery drawings), they find that: Keep Reading

Trading Friction and Investor Behavior

Do individual investors vary stock trading behavior according to the friction associated with trading? In his May 2010 paper entitled “Liquidity Clienteles: Transaction Costs and Investment Decisions of Individual Investors”, Deniz Anginer investigates the relationship between position holding period and trading friction (stock illiquidity) and the effect of this relationship on net investment performance. Using data from a large discount brokerage firm encompassing two million trades of 66,000 households over the period 1991-1996, he concludes that: Keep Reading

Visualized Experience Versus Numerical Statistics

Do investment choices derived from experiencing and visualizing returns differ from those derived from analyzing numerical return distribution statistics? In their May 2010 paper entitled “How Much Risk Can I Handle? The Role of Experience Sampling and Graphical Displays on One’s Investment Risk Appetite”, Emily Haisley, Christine Kaufmann and Martin Weber examine how different types of five-year investment performance information (numerical statistics, simulations of portfolio allocation outcomes, graphical displays of the distribution of these outcomes and a simulation/graphics combination) influence the investment risk taking of individuals in an experimental setting. Using data from a series of three experiments in which 133 German, 188 American and  362 American participants choose allocations to a risk-free and a risky asset, they conclude that: Keep Reading

Bypassing Trading Frictions?

Several readers have proposed that one can bypass trading frictions (transaction fees and bid-ask spreads) for market timing strategies via an account with a mutual fund manager that allows free and frequent fund switching, such as ProFunds and Rydex/SGI. Such switching is limited to the end of the day, and these funds do have annual management fees. Does this approach truly bypass trading frictions? Keep Reading

Individual Investor Trading Motivators

What makes individual investors trade more or less? In the March 2010 version of their paper entitled “Success/Failure of Past Trades and Trading Behavior of Investors”, Sankar De, Naveen Gondhi, Vishal Mangla and Bhimasankaram Pochiraju investigate how trading results affect future trading. Using detailed trading histories for 1.32 million individual Indian investors  involving 111 million transactions worth $85 billion in S&P CNX Nifty stocks during January 2006 through June 2006, they find that: Keep Reading

Housing Price Reversion to Trend

Do real housing prices revert to some trend? If so, where do they stand now with respect to trend? In their February 2010 paper entitled “The Margin of Safety and House Price Turning Points: Observations from the US, the UK and Japan”, Mitsuru Mizuno and Isaac Tabner investigate real housing price deviation from and reversion to trend in three developed markets. Using quarterly measures of housing price, inflation, disposable income, GDP and rent from 1960 (UK), 1963 (U.S.) and 1977 (Japan) through 2009, they conclude that: Keep Reading

Performance of Individual Chinese Investors

Does the experience of individual investors in China confirm that trading tends to transfer wealth from individuals to institutions? Are there groups of individual investors who excel? In their February 2010 draft paper entitled “Do All Individual Investors Lose by Trading?”, Wei Chen, Zhuwei Li and Yongdong Shi examine the trading performance of three categories of individual investors segmented by account size and several categories of institutional investors. Using the complete transaction history and account information of all traders on the Shenzhen Stock Exchange (68.4 million individual and institutional accounts) to construct portfolios that mimic the buys and sells of each investor group over the period 2002-2007, they conclude that: Keep Reading

Return on Stamps

Do stamps provide a good return compared to equities? Can investors use stamps to hedge against inflation? In the February 2010 version of their paper entitled “Ex Post: The Investment Performance of Collectible Stamps”, Elroy Dimson and Christophe Spaenjers investigate the returns on British collectible postage stamps over the long term. Using Stanley Gibbons stamp catalog prices to construct a value-weighted British stamp price index/returns and returns for other asset classes over the period 1900-2008, they conclude that: Keep Reading

Individual Risk Tolerance Under the Hood

How can an advisor accurately gauge and effectively respond to the risk tolerance(s) of an advisee? In their January 2010 paper entitled “Beyond Risk Tolerance: Regret, Overconfidence, and Other Investor Propensities”, Carrie Pan and Meir Statman: (1) argue that the typical questionnaire used to assess advisee risk tolerance is deficient for five reasons; and, (2) offer remedies for these deficiencies. Using historical asset class return data and results of multiple investor surveys, they conclude that: Keep Reading

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