Do expert investors (institutional stock portfolio managers) add value both by buying future outperforming stocks and by selling future underperforming stocks? In their December 2018 paper entitled “Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors”, Klakow Akepanidtaworn, Rick Di Mascio, Alex Imas and Lawrence Schmidt examine trade decisions of experienced institutional (e.g., pension fund) stock portfolio managers to determine whether they buy and sell shrewdly. In their main tests, they evaluate: (1) positions added versus randomly buying more shares of some stock already in the portfolio: and, (2) positions liquidated versus randomly selling some other holding that was not traded on that date. Using data for 783 portfolios involving 4.4 million trades (2.0 million sells and 2.4 million buys), and prices for assets held and traded in U.S. dollars, during January 2000 through March 2016, they find that:
- The average portfolio in the sample:
- Holds 78 stocks, with standard deviation 68.
- Turns over about 4% of assets per month, with standard deviation 5.7%.
- Has market beta about one, and average exposures to size, book-to-market and momentum close to zero.
- Beats respective benchmarks by 0.22% per month (2.6% per year). Since factor exposures are near zero, this result indicates overall stock-picking skill.
- Positions added outperform stocks already held by an average 0.60% over one year and 0.87% over two years, indicating skillful buying.
- However, positions liquidated also outperform stocks already held, by an average 1.00% over one year, indicating adversely biased sell decisions.
- Expert investors generally pay more attention to buy decisions than sell decisions, as evidenced by decisions coinciding with attention-grabbing firm earnings announcements.
- Positions liquidated on earnings announcement days (other days) outperform (underperform) stocks already held by about 1.0% (2.0%) over the next year, suggesting inconsistent attention.
- In contrast, positions added on earnings announcement days perform about the same relative to stocks already held as those added on other days, suggesting consistent attention.
- Based on interviews with portfolio managers:
- “Selling is simply a cash raising exercise for the next buying idea.”
- “Buying is an investment decision, selling is something else.”
- Many agree that they rush sell decisions in attempting to time buys.
- In the absence of attention-grabbing news, experts overweight past returns when selling, but not when buying.
- Experts liquidate both their worst and best performing stocks at rates over 50% higher than stocks with modest past returns. Buys exhibit no such pattern.
- Experts exhibiting the strongest tendencies to sell based on past extreme returns exhibit the worst selling outcomes.
- Findings are robust to using risk-adjusted returns and to model changes.
In summary, evidence indicates that expert stock portfolio managers tend to be sloppy when liquidating positions, but not when adding positions.
Cautions regarding findings include:
- Sampled expert investors may have motivations for taking gains/losses other than maximizing future portfolio return.
- Sampled investors may not be representative of other types of investors.
