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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.

Naive Investors: Illusions of Personal Past Performance

Do individuals understand their actual aggregate investing/trading performance? In their July 2007 paper entitled “Why Inexperienced Investors Do Not Learn: They Don’t Know Their Past Portfolio Performance”, Markus Glaser and Martin Weber measure whether individual investors can correctly estimate personal absolute and relative stock portfolio performance. Using the responses of 215 online investors to a 2001 internet survey and actual portfolio returns for these investors during 1997-2000 as calculated from their holdings during that period, they find that: Keep Reading

Evaluating “Retail” Investment Managers

Readers recently requested evaluations of two different retail investment managers. Our reviews involve simply putting the information the firms make available on their web sites into the context of broad stock market research. Our findings for the two firms are similar, as follows: Keep Reading

Recent Evidence on Individual Investor Performance

What is the recent evidence on the performance of individual investors? Do some persistently outperform and, if so, why? In the February 2007 draft of their paper entitled “The Performance and Persistence of Individual Investors: Rational Agents or Tulip Maniacs?”, Rob Bauer, Mathijs Cosemans and Piet Eichholtz examine the performance and persistence of individual investors trading at a Dutch online broker. Using a database consisting of more than 68,000 accounts and eight million trades in stocks, bonds and derivatives during January 2000 to March 2006, they find that: Keep Reading

More Information is Better?

Is more investment information always better? Are there unintended consequences for individual investors/traders acquiring investment information? Specifically, do individual investors/traders systematically acquire information to support rational future decision-making, or do they focus on information that confirms (and builds overconfidence in) decisions already made? The following two recent studies examine these questions, with results as follows: Keep Reading

How Investors Do (or Don’t) Take Advice

How do typical investors/traders process advice from others? Are they overconfidently dismissive, or underconfidently trading on the latest guru pronouncement? In their February 2006 paper entitled “Effects of Task Difficulty on Use of Advice”, Francesca Gino and Don Moore perform two controlled experiments to examine the tendencies of people to reject or accept advice depending on the complexity of the associated task. In one experiment, the 61 participants (mostly university students) must seek advice, and in the other they have the option of seeking advice. Since the advice came from other participants who were generally no better informed, the best strategy for each participant was to reduce noise by averaging own opinion and advisor’s opinion. Based on the results of these experiments, the authors conclude that: Keep Reading

Are Individual Investors Entrepreneurs? If So…

Is success as an entrepreneur all luck, or is there a provable contribution from skill? Do winners win just because they are willing to roll the dice, or because they consistently bring innovative insights to the market? In their July 2006 paper entitled “Skill vs. Luck in Entrepreneurship and Venture Capital: Evidence from Serial Entrepreneurs”, Paul Gompers, Anna Kovner, Josh Lerner and David Scharfstein pit skill against luck by investigating the persistence of success among serial entrepreneurs. Focusing on the founders of companies listed by Venture Source as recipients of venture capital during the period 1975-2000, they conclude that: Keep Reading

The Timing (In)Ability of Mutual Fund Investors

Do mutual fund investors move their money into and out of the stock market at the right times, or the wrong times? In their August 2006 paper entitled “Mutual Fund Flows and Investor Returns: An Empirical Examination of Fund Investor Timing Ability”, Geoffrey Friesen and Travis Sapp examine the flows of funds to/from individual mutual funds to measure the timing ability of fund investors. They define a “performance gap” between the time-weighted (buy-and-hold) return and the dollar-weighted (actual investor average) return as the measure of investor timing ability. Using monthly data for 7,125 mutual funds over the period 1991-2004, they find that: Keep Reading

A Warm Embrace or Cold Shoulder for Hot Hands?

Do sophisticated (wealthy) investors chase hedge fund returns? If so, should they? In their March 2006 paper entitled “Do Sophisticated Investors Believe in the Law of Small Numbers?”, Guillermo Baquero and Marno Verbeek investigate whether sophisticated hedge fund investors exhibit “hot hands” bias by overreacting to small samples of fund performance. They hypothesize that investors who believe that hedge fund performance is predominantly skill (luck) are prone to overestimate the likelihood of performance persistence (mean reversion) in small samples, leading to an overly trend-following (contrarian) investing style. Using quarterly performance and funds flow data for 752 hedge funds between 1994 and 2000, they conclude that: Keep Reading

The Odds of Winning as an Active Trader

How active are active traders? What are the odds that an active trader will make a profit? How are winners different from losers? In their recent paper entitled “The Profitability of Active Stock Traders”, Ryan Garvey and Anthony Murphy examine the outcomes for a large group of active traders over a three-month period. Using data for over 400,000 trades by 1,386 day traders from a direct access broker in the U.S. over the period March 8, 2000 through June 13, 2000 (68 trading days), they find that: Keep Reading

Training for the Investor/Trader Hurdles

Investors and traders face three hurdles on the track to success: (1) developing a workable strategy/methodology as a foundation for decision-making; (2) persistently performing the research needed to reconfirm/improve/adapt the strategy; and, (3) overcoming emotional temptations to ditch strategy and research by succumbing to fear or greed.  Keep Reading

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