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« Weighing the Week Ahead: New Information from Earnings | Main | What Apple Should Learn from Intel »

July 12, 2010

Comments

Dean

Here's a good paper on individual investors outperforming.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=364000

This in no way contrary to Jeff's point as it shows how better investors continue to outperform, while average investors don't. Though it does encourage those of us looking to outperform. The list of advantages that individual investors have is very long, perhaps even longer than the list of behavioural failings and biases they need to overcome. In my book, knowing yourself and patience are the first two keys to success.

Gus

Your point about political bias in the investment media is specially evident in the remarks of several of the anchors on CNBC, to the point that they loose objectivity and credibility. Now I tune into Bloomberg that just gives the news.

Proteus

I'll add what little I know to the last two comments (Jeff: Hope you don't mind).

CXO Advisory in March cited an SSRN paper that showed Chinese investors with large accounts (presumably more experienced) had higher returns than those with small accounts. The difference was quite significant, and apparently due to reasons that might be expected - buying value stocks and trading less frequently. They also have links to additional studies.

Mark Hulbert wrote about dollar-weighted returns in mutual funds (Oct 6, 2006) being lower than the time-weighted (published) returns, due to investors buying high and selling low. The effect in the big Vanguard funds cost investors more than 1.5% a year. An exception was the average investor in the Fidelity Growth and Income fund actually added more than 1% a year to their return due to superior timing, so there are some sharp individuals out there.

And I will add my vote for continuing to provide links. Even if they are part of my regular reading list, seeing a link often makes me rethink my original interpretation.

Dean

Hi Jeff, I'm still loving your blog, but didn't find this post up to your usual high quality.

Many studies have shown that individual investors, managing their own accounts, do about 5% worse than they would if simply buying an index fund. The top investment managers have regularly beaten the averages, so it is a big spread.

How about an apples to apples comparison.
You're comparing average investors with top managers. While I know that was merely an introduction and not central to your point, I found it incongruent from a guy who normally takes such care with his assertions.

On top of which there is plenty of evidence to show that agency costs are a permanent feature of fund managers and as Patrick said that the average manager under-performs.

The average investor contains all investors. Do you know of any evidence that analyses experienced investors, say 10 years plus experience and accounts over say $300k, or any other figures.

On a more positive note, I really appreciate all the links you provide.

Patrick Keeler

The sentence, "The top investment managers have regularly beaten the averages, so it is a big spread.", is clumsy at best. Having read your blog for over a year, I doubt you are trying to be misleading. What are you actually trying to say? It is pretty established that most professionals do not beat their relevant index.

http://www.forbes.com/2010/02/16/mutual-funds-active-management-debunked-personal-finance-indexer-ferri.html

If you are saying, "top" means the 5-10% of investors that actually beat their index, then it is misleading. What about the other 90-95% that don't? It is like saying that "most top hitters bat over .300" when the majority of MLB'ers bat under .300. Individuals tend to invest in mutual funds that underperform by 1-2% with a 1-3% fee, which gives you their 5% underperformance.

jdb

I appreciate the links. I learn much from them.

BigJake

My favorite thing to tell people who believe in the PPT is: If you believe there is a conspiracy and the Fed is propping up the market, why are you not super duper long? I mean the Fed prints money right, and if they are consipiring to prop the market, it stands to reason that they are doing that with printed money that is not reported under whatever the Fed and the treasury's legal standards are. Why would anyone ever bet against the PPT? Just join the conspiracy and make hordes of cash!

David

I click thru many of your links, but not all. Your previous comments links were read when you first posted them! While many other links are not read, they add to your credibility. We know your thoroughness and that the links back up your arguments. Not adding your links would diminish this credibility - after all, with the links in place, I have the OPTION of spot checking your evidence!! Love your systematic approach. Keep up your high standards.

John the Cheap

I for one definitely appreciate the links, although if they are sources that are on my own regular reading list I don't click through from here.

mike

lol. I wonder if links have replaced footnotes in term papers? More links, better grades?

mike

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