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Do Day Traders Evidence Skill?

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Professors of finance Brad Barber and Terrance Odean have done extensive research on the performance and habits of individual investors. Among their findings is that, on average, individual investors lose money from trading – and not all of the losses can be explained by trading costs. They’ve found that individual investors can have perverse security selection abilities – for example, buying stocks that earn sub-par returns and selling stocks that earn strong returns. They also have found that women produce better results than men, and that those who trade the most have the worst risk-adjusted returns. And demonstrating that more heads aren’t necessarily better than one, the average investment club lagged a broad market index by almost 4 percent a year. Adjusting for risk, their performance was even worse. Clubs would have been better off never even trading during the year.

How significant are the costs of underperformance? In a study on the Taiwanese market covering the period from 1995-1999, they found that the aggregate losses of individual investors exceeded 2 percent of the country’s annual gross domestic product.

The body of evidence demonstrates that even the most skilled investors have a hard time generating alpha (risk-adjusted excess returns) after all expenses are accounted for.

Read the rest of the article on Seeking Alpha.

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