Wednesday, August 15, 2007

Can individual investors outperform?

Do some individual investors consistently outperform? That is the question asked by the CXO Advisory blog in a review of a recent paper that examines the investment performance of individual investors.

Here is an abstract of the August 2007 paper in question, entitled, "Performance Persistence of Individual Investors".

This paper investigates the stock market performance persistence of individual investors. The study is based on unique data that allows us to observe month-end stock market portfolios of all individual investors over an eleven year period.

We find that a substantial number of investors exhibit economically and statistically significant performance persistence. This is robust to how we measure past performance, how often investors trade and whether investors are small or large. Unlike the evidence from mutual and pension funds, the persistence in performance we uncover is not concentrated in investors with poor prior performance. We also show that forming a portfolio that is long in stocks previously favored by top performing investors earns a substantial risk adjusted return in the future.

You can download the paper in PDF format at the SSRN site link above, or check out the CXO Advisory blog's post for a brief rundown of their findings.

If you find their review interesting, you might also want to check out the CXO blog's other posts on this topic, which you'll find linked at the bottom of their post.

You can also check out the CXO Advisory blog for more interesting posts by clicking on the link in our sidebar blogroll.