Attention Single Men: Stop Trading So Much
By Nick Kapur
March 7, 2009 | Comments (11)
Recs
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Beyonce recently topped the Billboard Hot 100 chart with a multi-platinum anthem for all the single ladies. I thought some of the men out there may be feeling a bit left out, so I composed a little ditty of my own. Here it goes:
All the single men, all the single men
All the single men, all the single men
All the single men, quit trading your stocks so damn much. Oh, Oh, Ohhh.....
(Insert killer dance moves)
That's all I've got so far. Good stuff, right? It's kinda catchy and, all kidding aside, I may have just done you a big favor.
Can I send you my demo?
The sad truth is that men (and single men in particular) persistently overtrade stocks, leading to well-documented underperformance. Surprised? You shouldn't be. It's all thanks to a baffling combination of impatience and overconfidence.
Pay attention, because this is information you'll want to hear.
According to an oft-cited study by Brad Barber and Terrance Odean, men trade an unimpressive 45% more than their female counterparts, earning them annual net returns of -- get ready -- 1.4% less than the ladies. Worse still (for unmarried guys like me) is that single men trade a whopping 67% more than single women, earning them annual net returns of 2.3% less! The authors cite increased trading costs, taxes, and a greater tendency to speculate as reasons for this underperformance.
The unexpected great investors
To illustrate this seemingly minor but actually substantial performance gap, let's say you and your female friend both start out with $10,000 apiece. She allows herself to earn the market's historical return of 10.8% per year for 10 years. You, on the other hand, insisting that you're a savvy trader, trade 65% more, and, as a result, you earn only 8.5% per year on your money.
At the end of 10 years, she has amassed a notable $27,900 (without adding any new money). Meanwhile, you're sad to discover that you've only got $22,600 to your name. Poor show.
Now, imagine this problem exasperated by greater lengths of time and larger amounts of capital added to the equation. This smallish earnings gap would begin to expand at a mind-boggling rate.
Why you think you are better
There are a number of theories as to why men trade more often -- none of which are terribly shocking.
Many believe that men trade more often because they are generally more interested in the stock market and thus spend more time around stocks, the financial media, and their brokers. Others believe that the answer is written in our biological past -- some nonsense about hunters and gatherers. But the real reason has a lot more to do with the dastardly combination of plain old impatience and undeserved overconfidence.
That's not to say that women are never impatient or overconfident -- but when it comes to money, guys tend to convince themselves that they are the master.
And the truth is that it doesn't really matter why we trade so much more often. It matters that we do trade more often. And it matters that it hurts us as investors.
Say it with me: "It's not my fault!"
A quick examination of the investment world (run largely by men) reveals a chronic proclivity toward overtrading, especially at the big Wall Street banks. Take a look at some of the more popular stocks out there and the number of Buy/Sell/Hold decisions active in the last month:
Company
Buy
Hold
Sell
Cisco (Nasdaq: CSCO)
17
13
0
Bank of America (NYSE: BAC)
6
10
3
PepsiCo (NYSE: PEP)
9
4
0
Caterpillar (NYSE: CAT)
4
15
2
Carmax (NYSE: KMX)
0
10
2
Walgreen's (NYSE: WAG)
7
11
1
Yahoo! (Nasdaq: YHOO)
8
22
4
*Data provided by Thompson/First Call.
When we see so many conflicting opinions changing on a frequent basis, of course it feels natural to trade a lot. It's ingrained in our larger investment culture. The big boys do it (at the banks), they make a lot of money (at least, they used to), and as humans we like to imitate authority figures.
The only problem is: It just doesn't work.
The great minds of the investing world confirm that if you plan on beating the market, you should avoid overtrading. Barber and Odean can prove it once again. The pair discovered that the 20% of American households that traded the most (turnover of about 250% per year) vastly underperformed an entire group of more than 66,000.
Who benefits?
A more serious examination of this trading culture of ours explains why investment houses (and the media too, to some degree) are so motivated to have us trade frequently: They get paid more for doing so. Many stock brokers are paid on commission. If you don't trade, they can't buy that sweet Porsche that they've been eyeballing.
The problem for you is that an overly active trading strategy is far less likely to help you consistently buy low and sell high and far more likely to:
1. Leave you on the sidelines when the market has really big days.
2. Generate tremendous costs in commissions and taxes.
3. Benefit people that you don't necessarily like.
That's a central fact of investing. And, unfortunately, these poor practices seem to have become so mainstream that no one feels comfortable questioning them.
But question them I do
If men (and all investors for that matter) really want to start doing their portfolio a solid, they must resist the urge to constantly turnover their portfolio. The practice is unnecessary, benefits the wrong people, and prevents money from growing in the most efficient manner possible.