Beat the Market by Fixing This Behavioral Flaw


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Jae Jun

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Daniel made a great point from his 25 investing lessons. It is incredibly difficult to beat the market.

I haven’t beaten the market for 2 years straight now, although I hope to break that trend this year.

The most recommended method is to invest in the index but for people like myself, there’s no fun in that. Profiting and making money is the end goal, but I know that it isn’t the only goal which is why I continue to learn and invest on my own.

One way in which individual investors, myself included, can work to improve is by lowering activity and churn.

Reduce Activity and Lower Churn

In 2010, I had a total of 83 transactions. In 2011 that number dropped to 42 and 2012 YTD it has come down drastically to 13. Only possible because it was an area I identified as needing improvement and consciously worked towards.

I’ve documented my struggles in 2010 and 2011 so I won’t get into all the details, but increased activity was definitely hindering performance.

My brokerage fees are $7.95 per trade.

83 x $7.95 = $659.85 down the drain.

Had I only made 20 trades in 2010, my performance would have improved by $500.

An article I read from AAII last week resounded deeply with what I have been working on this year.

decisions of individual investors who sell a stock and buy a stock, which means that they are not selling it for liquidity; they’re selling it because they believe the stock they sell is inferior to the stock they buy. There is no other reason. Now, when you wait a year, and you look at the value, on average, of the stock that individual investors sell and the stock they buy, then you get a difference of 3.5%, roughly, almost 4%. So that means every action the individual investor takes has negative expected value. On average, they lose, and the more ideas they have, the more they lose. Women do better than men because they churn their accounts less. – AAII

If you’ve been a long time reader, you’ll know that I tend to go through a lot of stocks. I may not write about specific stocks as much but I have a lot of ideas throughout the course of one year which isn’t always a good thing.

I bought RSH before earnings and promptly afterwards it dropped more than 30%. Had this happened in 2010, I would have looked at the bad results and sold it at a loss categorizing it as a mistake even though it is such a small position.

This time around, I’m not jumping to conclusions so quickly. I’m going to wait a little longer to digest and understand the information. There is a fine line between rationalizing and not “jumping to conclusions”, but I am aware of the differences and how I react to each one.

After reading this, what is your activity like? Is this something you can relate to or not?

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