Individual Investing

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

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

How often should an investor/trader check the performance of their positions? Does it make a difference (psychologically) whether one checks frequently or infrequently? In their 2005 paper entitled “The Scaling Property of Randomness: The Impact of Reporting Frequency on The Perceived Performance of Investment Funds”, Nigel Finch, Guy Ford, Suresh Cuganesan and Tyrone Carlin use actual investment fund performance data to explore the likelihood that an investor would have viewed the performance as positive or negative based on sampling frequency. Applying prospect theory (a loss in wealth has a negative impact 2.25 times greater in magnitude than the positive impact of a gain in wealth) to data for four large Australian investment funds (see table below), they conclude that: Keep Reading

What personality traits, if any, support successful investing practices? In their March 2006 paper entitled “An Intimate Portrait of the Individual Investor”, Robert Durand, Rick Newby and Jay Sanghani investigate the relationships between personality and both investment decisions and portfolio performance. To measure personality, they apply three perspectives: (1) the “Big Five” personality traits (Negative Emotion-Neurotic, Extraversion, Openness to Experience, Agreeableness and Conscientiousness); (2) psychological gender traits (Masculinity and Femininity); and, (3) personality traits of Preference for Innovation and Risk Taking Propensity. Using personality profiles for 21 Australian self-directed investors along with information about their trading and investment performance during July 2004-June 2005, they conclude that: Keep Reading

What are the essential habits of highly effective (wealthy) investors? In his March 2006 paper entitled “Why do Wealthy Investors have a Higher Return on their Stocks?”, Yosef Bonaparte analyzes data from the triennial Survey of Consumer Finances to find out why the wealthiest investors achieve superior stock returns. To frame the analysis, he defines two types of investment opportunity search: (1) informal (use of magazines, newspapers, online services and friends or relatives); and, (2) professional (use of experts such as accountants, financial planners and brokers). Using results from recent surveys, he concludes that: Keep Reading

What formal studies does academia have to offer on the role of emotions in equity investing/trading? In their October 2004 paper entitled “The Role of Feelings in Investor Decision-Making”, Michael Dowling and Brian Lucey synthesize the results of two threads of recent areas of research on whether and how emotions affect investing: (1) mood misattribution (the impact of environmental factors, such as the weather, the body’s biorhythms and social factors); and (2) image (how investors feel about companies separately from any financial analysis). They note that: Keep Reading

The Internet enables rapid flow and ebb of trading memes. Trend followers hope to ride a meme and get out before it fades. Contrarians take the other side in anticipation of the fade. Traditional tools for inferring memes include price-volume action and market sentiment. Do emerging information-filtering technologies present novel ways of discovering investing/trading memes from surges of news on the web? Building on ideas offered in the article “Finding Signals in the Noise” from Technology Review, we offer a few possible meme-detectors: Keep Reading

What can small-trade volume tell us about the behavior and success of retail investors? Two December 2005 papers tackle this question. In a paper entitled “Small Trades and the Cross-section of Stock Returns”, Soeren Hvidkjaer investigates the effect of retail investor trading behavior on stock returns by studying intermediate-term and long-term returns for stocks with small-trade buying or selling pressures. In a paper entitled “Do Noise Traders Move Markets?”, Brad Barber, Terrance Odean and Ning Zhu offer a similar study, adding an analysis of the short-term returns for stocks with small-trade buying or selling pressures. Their joint findings are: Keep Reading

We have selected for retrospective review a few all-time “best selling” research papers of the past few years from the General Financial Markets category of the Social Science Research Network (SSRN). Here we summarize the December 2002 paper entitled “Can Individual Investors Beat the Market?” (download count over 4,000) by Joshua Coval, David Hirshleifer and Tyler Shumway. This research investigates the persistence of outperformance and underperformance among individual investors/traders in stocks. Using data from a large discount broker on trades in 115,856 accounts during 1/90 through 11/96, they conclude that: Keep Reading

In their January 2005 paper entitled “Who Loses from Trade? Evidence from Taiwan”, Brad Barber , Yi-Tsung Lee, Yu-Jane Liu and Terrance Odean investigate wealth transfer between individuals and institutions in financial markets. Using a complete common stock trading history of all investors in Taiwan (the 12th largest financial market in the world) for 1995-1999, they document that: Keep Reading