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Why do investors like to trade so much?
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Manikamaniko.
Master |
29-Jul-2007 18:14
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Perhaps at a time like this... when the market is uncertain... It may be good to brush up on how to survive in the market in the long term... |
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Manikamaniko.
Master |
29-Jul-2007 14:57
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The probem is when a stock slides, those who have sold never buy it back at a lower price. |
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winsontkl
Elite |
29-Jul-2007 13:31
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Livermore, Thanks for the advice. Risk management.... love it. |
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Livermore
Master |
29-Jul-2007 13:27
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Hi Winsontkl, Cheers! We all make mistakes. But sometimess depending on individual, not all will change. It took me quite a while to see long term investment in the correct perspective. Like you, it was precisely because I spotted quite a few good stocks and because I involved myself too much in trading that I never bought back after I sold. Now these good stocks are in the "sky". Although I advocate long term investment, I shall not sit and do nothing if I am going to suffer a loss. You can also maximise your returns on long term investment by maybe selling half and buying back at a lower price during a major correction. |
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Livermore
Master |
29-Jul-2007 13:18
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Hi ITrader, Yes, I have a exit price. I basically play a "cat and mouse" game with the market. I do that during the initial buy phase. Although I advocate long term investment, when market is in a major correction, I do have a plan. Let me explain. My style is averaging up and preferranly not more than 10-12c range but sometimes I do cross over this range. So there is a stock that is now 82c and my last purchase price was 76c. If the stock falls to 76c, I could sell off all the lots at 76c. Before 76c, my purchase price was 66c. so if it falls to 66c, I could sell off those I bought at 66c. My first purchase price was 55c. It is important to cover your positions. That is what I stagger my purchases. |
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winsontkl
Elite |
29-Jul-2007 13:11
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Livermore, like your view towards investment. Have experienced what you mentioned and learned the hard way. When buying a potential company with great growth . Thinking making a profit of 100% plus another 100% from its warrant provide wonderful return and sold off. But who know, the price shot up double within less than a week to double within two weeks and four times within months, bang my head. Well, as you mentioned, INVEST and not trade, should be the key most investors must learn and be disciplined enough to follow. |
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iTrader
Member |
29-Jul-2007 09:42
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Livermore. Do you have a exit price for the share that you hold if the market keeps falling?. |
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Livermore
Master |
29-Jul-2007 09:33
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Invest and not trade |
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cyjjerry85
Elite |
29-Jul-2007 01:08
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still think trading in a fundamentally good stock is much better than putting it in a fixed deposit or lousy unit trust that charges high and slow growth |
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Livermore
Master |
29-Jul-2007 00:33
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Just read about what is happening in the world and it is not that hard to decide if one should be holding equities for long term. Infrastructure in emerging economies is a huge theme which will last for many, many years. The same goes for oil. Too me one of the problem with oil is this. Construction, labour and material cost for projects are high. This could discourage investments in oil. When that happens, supply will not be enough as demand will keep growing and growing. That is why I think oil price is likely to remain high for a long, long time..... |
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Manikamaniko.
Master |
29-Jul-2007 00:22
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Livermore... :) |
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Livermore
Master |
29-Jul-2007 00:16
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Yo Mani, You sound like Indian when I address you like that:). Yeah, I still believe in long term. When I got hit by the crash in March, my stock fell from $1.60 to $1.30. After analysing, I realise, I can do something. I thought what if I had sold off half and bought back at $1.30, I would have made much more as the stock is now $2.49! But I only wait for the major correction. Sometimes it is not much point trying to time the market. Let me explain. When STI hit 3000, quite a few poeple say "Sell!". Well market headed higher and higher. So the person who sold is wondering "Should I chase or wait for it to correct." For the person who chose to wait, the situation he finds himself when the market has a major correction is this. For example, he sold at $1 when STI reach 3000, then when the market finally crashed, he finds the price of the stock is maybe $1.20. So he finds himself buying at a higher price. So I told my friends "Don't time the market".Let it hit you. You are nearer "the mark" then trying to anticipate. Once again, I still stress too much buying and selling is not the way in my opinion... |
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Manikamaniko.
Master |
28-Jul-2007 23:47
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Livermore... :) Ah, you got to the point at last... since you are such a staunch advocate of 'holding for the long term'. In a downtrend or a bear market, which no one can really predict, one is forced to agonise over whether to sell off first then buy back later at a lower price... ... And this is what trading is all about !!! ... 
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soyabean
Member |
28-Jul-2007 23:47
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I think, investing sometimes can be likened to gambling as well. In a way we are also taking calculated risks and bets when buying into something. If we are talking about growth stocks, we want it to chiong quick quick at the risk of suddenly losing a considerable amount. If considering value stocks, we risk opportunity risk for holding while hoping someday it will be recognized. Either way, we like to have constant assurances that we are making the right calls, hence have to consisently fight the urge to trade continually... |
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Livermore
Master |
28-Jul-2007 23:38
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In my view, minimal buying and selling is better. But when there is a very major correction, you can do something to further increase your profit even for stocks you intend to hold for long term |
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des_khor
Supreme |
28-Jul-2007 00:43
Yells: "Tell me who is the God or MFT from this forum??" |
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More buy or sell in the end the big winner are broking house & SGX !! |
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lg_6273
Elite |
27-Jul-2007 21:31
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Published July 27, 2007 Why do investors like to trade so much? Perhaps for some, trading is like consumption and they trade for the sheer pleasure of it By AVANIDHAR SUBRAHMANYAM IN the real world of finance, there are a number of puzzles which remain unexplained by theory. Students of finance traditionally learn, for instance, that portfolios should be allocated based on a trade-off between risk and return and that the desire for higher returns necessitates taking on more risk. Learning from history: Recent research in behavioural finance has quite a lot to teach investors. One of its insights is that the best predictors of future returns are past returns, trading volumes as well as accounting ratios The celebrated Black Scholes formula explains the formation of prices of derivatives, such as options. These ideas are all based on the notion that the individual is a rational, calculating investor, making decisions to maximise wealth. The proponents of some of these ideas were awarded Nobel Prizes. However when it comes to the real world of finance, the theories fall short of explaining why certain things happen. Why do investors trade, and do so frequently? How do they decide upon the composition of their portfolios? Why are there stock market bubbles, like the tech stock overvaluation of the early 2000s? Why has trading volume on stock exchanges increased at a pace that is not explained by returns earned by investors? Despite awareness of the benefits of diversification, why do many investors only hold a handful of stocks in their portfolios? Then again, research shows that variation in returns across stocks is due to factors other than risk. In the arena of corporate finance, recent evidence indicates that finance managers' decisions to raise capital appear to be a result of 'market timing' to exploit equity market mispricing and rather than conform to what theories predict about rational managers. In spite of these shortcomings, the 'Neoclassical' theories have maintained a virtual stranglehold on how finance is taught in MBA programmes across the world. But some of the unanswered questions are being increasingly addressed by behavioural Finance', a new school of thought that has emerged over the past decade. Finance education in general can be more useful if it sheds specific light on active investing by addressing aspects such as: What mistakes to avoid while investing, and What strategies in financial markets are likely to work in terms of earning supernormal returns. Those are the main goals of behavioural finance, which allows for explanations of financial phenomena based on 'nonrational' behaviour amongst investors. Of late, behavioural finance has also been applied to corporate finance - for example, by linking behavioural characteristics of top executives (such as their level of confidence) to their decision-making. So what does recent research in behavioural finance tell us? One of its insights is that the best predictors of future returns are past returns, trading volumes and accounting ratios. Momentum effect Specifically, returns are negatively related to market capitalisation and volume, and positively to the book-to-price ratio of a stock. There is also evidence of a momentum effect', observed in many countries, that is, that stocks that have gone up in the past six to twelve months continue to go up in the next few months, and vice versa. There is little evidence, however, that risk measures such as systematic or total volatility are material for predicting equity returns. Recent work in behavioural finance also helps us understand the trading activities of individual investors. First, there appears to be a 'disposition effect' among individual investors, which can be termed as a tendency to sell winners too soon and hold on to losers too long. Thus, it is not uncommon for investors to avoid selling the stock of a well-known company even if its fundamentals point in a negative direction. On the flip side, a winning stock will be sold off too soon in the eagerness to realise profits even if there is upward momentum in the stock. This behaviour is consistent with the notion that realising profits allows one to maintain self-esteem but realising losses causes one to implicitly admit an erroneous investment decision, and hence is avoided. Interestingly, past winners do better than losers following the date of sale of stock by an individual investor, suggesting a perverse outcome to trades by individual investors. There also is evidence that women outperform men in their individual stock investments. This can be attributed to the notion that men tend to be more overconfident than women. The rationale for this explanation derives from evolution: it was believed that men, as hunter-gatherers, are required to be overconfident to take risks for the purposes of hunting in order to acquire food. We also know that investors who invest online perform better than investors who invest offline. However, once those offline investors switch to investing online, they perform better than the investors who were online earlier. The reason is that the more time investors spend investing online, the more they tend to trade excessively, which dissipates their profits. There is also survey evidence that stock market participation is influenced by social interaction: people who are more social, in the sense of interacting more with peers at collective gatherings such as at church, are more likely to invest in the stock market than those who are not so social. And why do individuals trade so much? Perhaps for some investors, trading is like a consumption good - that is, they trade for the sheer pleasure that trading provides in a manner similar to watching a sport or a film, or gambling in Las Vegas or Macau. Nonetheless, it appears that making investors aware of some of their common biases would be useful. Nascent field In sum, behavioural finance research has expanded considerably in recent years though much work needs to be done, including the development of comprehensive theories and cross-cultural studies of stock market behaviour. The fact that behavioural finance is a nascent field, however, should not detract from the point that students in business programmes should be exposed to the available research. Results so far established can go a long way in ensuring that MBAs are prepared on what goes on in the real world of investing and have an understanding of which strategies actually work in the financial markets. This article is an abridged version of the keynote address given by Professor Avanidhar Subrahmanyam, Goldyne and Irwin Hearsh Chair in Money and Banking at the University of California at Los Angeles (UCLA), at the 1st Singapore International Conference on Finance, hosted by the Saw Centre for Financial Studies at the NUS Business School. |
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