Individual Investing

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

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

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

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

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

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

Do works of art provide a good return compared to equities, or do they carry an aesthetic discount? Can investors use art to hedge equities? In their July 2009 paper entitled “Art as an Investment: the Top 500 Artists”, Roman Kraeussl and Jonathan Lee employ public auction prices from Artnet.com to construct and analyze a Top 500 Art Market index based on historical prices of artworks by the top 500 artists in the world (as ranked by Artprice.com). They relate art returns to those for commodities, corporate bonds, 10-year U.S. Treasury notes, hedge funds, private equity, real estate, global stocks and U.S. Treasury bills. Using prices for nearly 100,000 art transactions and contemporaneous quarterly levels of indexes for other asset classes over the period January 1985 through March 2009 (as available), they conclude that: Keep Reading

In his 2009 book Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition, author John Bogle has “not altered a single word of the original edition, but [has] chosen instead to update its voluminous data, and to comment on significant developments that have occurred since then…”, [trying his] “best to be candid in describing occasions when experience confirmed [his] insights of a decade ago, and when experience failed to do so…” One significant development over the past decade is the growing availability and diversity of Exchange-Traded Funds (ETF) as substitutes for mutual funds. Some notable reflections from the book are: Keep Reading

How do prices for art relate to prices for equities? Does art underperform or outperform stocks over the long run? In their November 2009 paper entitled “Art and Money”, William Goetzmann, Luc Renneboog and Christophe Spaenjers investigate relationships between equity prices and art prices and between incomes and art prices. To enable their analysis, they construct an art price index spanning 1765-2007. Since art price data draws heavily on sales in Great Britain, they focus on the British equity market and incomes. Using their art price index, a British equity market index and GDP data for 1830-2007 and British income data for 1908-2007, they conclude that: Keep Reading

A reader asked: “It seems that the strategies you identify as possibly working for individual investors involve infrequently rebalanced holdings of exchange-traded funds rather than specific stocks. Are there any stock-picking strategies that individuals can use to outperform the market?” Keep Reading