Friday, February 02, 2007

Article on what not to do when investing

Sometimes knowing what NOT to do shows us what to do. That is the case of Dowling and Lucey's paper entitled The 7 Deadly Sins of Investors. (FTR the target audience is Irish Investors, but their stories and advice are largely universal.

A few quick look-ins:
"In March 1999, an internet company called AppNet Systems....stated that the company would soon float on the stock market. ...investors ... rushed to buy. Unfortunately, many day-traders tried to buy shares in the company before it actually floated on the market, and ended up mistakenly putting their money into a similar-sounding company....The reason – the stock tickers of both companies, the symbols that appear on the trading screens of both professionals and day traders, were rather similar being APNT and APT. The share price of Appian shot up by over 140,000 percent in the space of two days"
While I am not totally convinced of the names for the "7 deadly sins", there is much good advice. For instance from the so-called Sloth section:
"The single greatest sin is falling victim to what is called ‘churn and burn’ :trading too
much. Every time you buy or sell a stock it costs you money....Rather than constantly changing your portfolio, you can improve your returns simply by buying and holding an investment... A study by US academics, Brad Barber and Terrance Odean, illustrates this principle. They found that the 20 percent of US households that traded the most earned average annual returns of 11.4 percent. The 20 percent of households that traded the least earned average annual returns of 18.5 percent. So, by doing very little, the low-trading households outperformed the heavy-traders by over 7 percent. Sloth pays.

The biggest culprits in over-trading are (young) men. Young men tend to be naturally aggressive and overconfident in their abilities. This leads them to change their investment portfolio too often. Barber and Odean, in another study, found that women are better investors than men, as they tend to trade less frequently."

CITE: Dowling, Michael M. and Lucey, Brian M., "The 7 Deadly Sins of Investors" (October 2006). Institute for International Integration Studies (IIIS) Available at SSRN:

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