finally and academic paper you guys will like :-)

V

vladiator

"Can Individual Investors Beat the Market?"

BY: JOSHUA D. COVAL
Harvard University
Finance
DAVID A. HIRSHLEIFER
Ohio State University
Fisher College of Business
TYLER G. SHUMWAY
University of Michigan

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Paper ID: Harvard NOM Working Paper No. 02-45
Date: December 2002

Contact: TYLER G. SHUMWAY
Email: Mailto:shumway@umich.edu
Postal: University of Michigan
Business School
701 Tappan Street
Ann Arbor, MI 48109 UNITED STATES
Phone: 734-763-4129
Fax: 734-936-8716
Co-Auth: JOSHUA D. COVAL
Email: Mailto:jcoval@hbs.edu
Postal: Harvard University
Finance
Boston, MA 02163 UNITED STATES
Co-Auth: DAVID A. HIRSHLEIFER
Email: Mailto:hirshleifer_2@cob.osu.edu
Postal: Ohio State University
Fisher College of Business
700 Fisher Hall
2100 Neil Avenue
Columbus, OH 43210-1144 UNITED STATES

ABSTRACT:
We document strong persistence in the performance of trades of
individual investors. Investors classified in the top 10 percent
place other trades that on average earn excess returns of 15
basis points per day. A rolling-forward strategy of going long
firms purchased by previously successful investors and shorting
firms purchased by previously unsuccessful investors results in
excess returns of 5 basis points per day. These returns are not
confined to small stocks nor to stocks in which the investors
are likely to have inside information. Our results suggest that
skillful individual investors exploit market inefficiencies to
earn abnormal profits, above and beyond any profits available
from well-known strategies based upon size, value, or momentum.
 
Thanx for the paper!:)

Interesting that the returns for being long a successful trader are greater than the returns for being short an unsuccessful trader. Given the old statistic about the 95% failure rate of traders and all the stories of people blowing up their accounts, I would have expected that unsuccessful traders would be extremely unsuccessful. Yet the paper suggests otherwise.

Perhaps there are some biases in their dataset (e.g., I'd bet that accounts the blew up and were closed during the sample period were not included in the data).

Otherwise, the paper's results suggests that "dumb" money is not that dumb, but that "smart" money is really smart. Perhaps "dumb" money trades in ways that are only slightly worse than random, while smart traders strongly exploit any inefficiencies.

Interesting paper... I will have to read it in greater detail.

Thanks again and hope that your fund is doing well,
Traden4Alpha
 
Quote from Traden4Alpha:

Thanx for the paper!:)

Interesting that the returns for being long a successful trader are greater than the returns for being short an unsuccessful trader. Given the old statistic about the 95% failure rate of traders and all the stories of people blowing up their accounts, I would have expected that unsuccessful traders would be extremely unsuccessful. Yet the paper suggests otherwise.
More...

Hi T4A, honestly, I have not had the time to give it a proper read, you might be right, but I thought the paper actually meant the successful do seem to have "hot hands" and the unsuccessful traders are persistently unsuccessful. I.e. if you buy what the good performers buy you'd do really well, and if you short what the unsuccessful bought, you'd do well as the dumb money continues to be dumb and you'd profit from trading against them.
The reason why I posted it here is that in light of the ardent discussions we all had here on the subject of market efficiency, I thought folks here (like Daniel_m and the like) who jumped on me for being an EMH proponent would like something that showed some individual traders seem to have the ability to exploit inefficiencies and that doens't appear to be just luck. As I said back then, I am open-mined on the issue and don't mind showing evidence that would help my opponents :)

Thanks again and hope that your fund is doing well,
Traden4Alpha
More...
You are welcome :) The fund is doing much better now than it did in December :D. I don't know what was so special about December except for the tax nuances but I didn't enjoy trading that month, to put it mildly...
 
vladiator,

anyone who is interested in reading proof that EMH is bunk can easily pick up Shefrin, Thaler, or Haugen to name a few. As well there are hundreds of individual academic papers which do the same.

Lintner (coinventor of CAPM) even co-wrote an unpublished paper that also further proves EMH is bunk. Wonder why he didn't publish it? :D

So thanks for that link but there are already mountains of papers that prove beyond a shadow of a doubt what most traders already know and feel in their bones.

All you have to do is bother to read them.
 
Many statistics already show that 20% of people in the market win and 80% lost. We also know personally that many people try to trade would lose money. Their money must be taken by some other guys. This paper just repeated the same statement. The problems are who are they and where are they and how could they do it?
 
Quote from Babak:

vladiator,

anyone who is interested in reading proof that EMH is bunk can easily pick up Shefrin, Thaler, or Haugen to name a few. As well there are hundreds of individual academic papers which do the same.

Lintner (coinventor of CAPM) even co-wrote an unpublished paper that also further proves EMH is bunk. Wonder why he didn't publish it? :D

So thanks for that link but there are already mountains of papers that prove beyond a shadow of a doubt what most traders already know and feel in their bones.

All you have to do is bother to read them.
More...


If you please, do have any links to these? Where is that unpublished Linter paper to be found? Thanks.
 
Quote from Babak:

vladiator,

anyone who is interested in reading proof that EMH is bunk can easily pick up Shefrin, Thaler, or Haugen to name a few. As well there are hundreds of individual academic papers which do the same.
More...

That's a little too strong. I've gone over this before in the EMH thread, but in short, showing a range of "anomalies" that supposedly undermine EMH is insufficient as long as there is no unifying theory that would explain them all. Besides, most don't hold up out of sample and/or after transactions costs.
Showing that any one is capable of having "hot hands" or consistently making money, on the other hand, if different. And I don't remember many papers that showed it. All the ones I can think of show return persistence on the negative side. - e.g. mutual funds that suck continue sucking. No performance persistence among winners. That's the first paper I've seen that shows it.

So thanks for that link but there are already mountains of papers that prove beyond a shadow of a doubt what most traders already know and feel in their bones.
All you have to do is bother to read them.
More...

Again, that's a little too strong. Those voluminous papers do make small dents in EMH's armour, but "beyond a shadow of doubt..." not really.
 
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