Is individual investing an inevitable series of randomly spaced ups and downs, or do some investors persistently enjoy more success than others? In their August 2007 paper entitled “Performance Persistence of Individual Investors”, Limei Che, Øyvind Norli and Richard Priestley investigate performance persistence among individual stock market investors/traders. Using monthly stock portfolio data for all individual investors who traded at least six times every 24 months on the Oslo Stock Exchange during January 1993 through June 2003 (65,848 investors), they find that:
- Returns for individual investors systematically decrease as the number of trades increases. Frequent traders tend to invest in small, risky stocks. They actually outperform in rising markets, but they suffer very large losses in down markets (almost double those of infrequent traders).
- Individuals that have done well (poorly) over the past two to five years continue to outperform (underperform) significantly on average for as long as the next three years. This persistence is robust to the method of past performance measurement, trading frequency and size of account.
- Individuals in the top 10% of past performers earn average abnormal (adjusted for size and momentum effects) monthly returns starting at 7.85% after one month and falling gradually to 5.20% after 36 months. In sharp contrast, the bottom 10% of past performers earn average abnormal monthly returns starting at -1.70% after one month and falling to -2.76% after three months before increasing steadily to less negative values at longer horizons.
- A portfolio of stocks favored by the top 10% of past performers (held by twice as many top performers as bottom performers) generates a statistically significant monthly alpha of between 0.72% and 1.25% depending on holding period. A portfolio of stocks favored by the bottom 10% performers (held by twice as many bottom performers as top performers) has an alpha that is close to zero.
In summary, some individual investors/traders do consistently earn economically significant abnormal returns.
