Monday, 16 January 2012

Private investors lose, institutions win due to over-trading

Brad Barber, Yi-Tsung Lee, Yu-Jane Lui and Terrance Odean analysed the Taiwanese market and showed that individual private investor losses equated to a 3.8% penalty on their performance, equivalent to a giant 2.2% of Taiwan’s GDP each year between 1995 and 1999.

Their empirical analysis presents a clear portrait of who benefits from trade: Individuals lose, institutions win. While individual investors incur substantial losses, each of the four institutional groups that we analyze – corporations, dealers, foreigners, and mutual funds – gain from trade.

The research can be found here, it is a rather technical paper, the conclusion can be found on pages 19 and 20:

A blog trying to estimate the damage for the US traders:

The estimate by the blogger of the losses in the US is USD 160,000,000,000, an unbelievable high amount which I can't verify, but which might be roughly right.

I have written in the past about long term returns on the Bursa Malaysia:

I estimated a loss of 1-2% per year due to trading (brokerage etc). Reviewing the above research I might have been too optimistic. Which means that my guess of 4-5% yearly returns is too high.

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