Objective research to aid investing decisions

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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.

Leverage Stock Investments While Young?

Should long-term investors view their retirement portfolios more like houses than savings plans? In other words, should they start out with considerable leverage and draw the leverage down gradually over time? In their October 2010 paper entitled “Diversification Across Time”, Ian Ayres and Barry Nalebuff investigate the effects of initially implementing and then gradually phasing out leverage for long-term (retirement) equity investment. This strategy exploits the large present value of investments made early in life, while protecting accumulated wealth from equity market volatility late in life. Tests limit initial leverage to 200%. Using return data for U.S. stocks and margin interest rate estimates over the period 1871 through 2009, they conclude that: Keep Reading

Seeking Confirming Opinions Rather Than Information?

Is participation in stock message boards/forums a net plus or net minus for the typical investor? In their July 2010 paper entitled “Confirmation Bias, Overconfidence, and Investment Performance: Evidence from Stock Message Boards”, JaeHong Park, Prabhudev Konana, Bin Gu, Alok Kumar and Rajagopal Raghunathan investigate how investors process message board information and analyze the impact of message processing on return expectations and investment performance. Using an incentivized online experiment conducted via the South Korean Naver.com message board to measure prior beliefs, information processing behavior and expected performance of 502 individual investors during October 7-21, 2009, they find that: Keep Reading

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

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