Barber and Odean

Happy Republic Day.

Google for Barber and Odean, you’ll get articles and studies based on the work conducted by two Professors Brad M.Barber and Terrance Odean. They have studied in detail about the behaviour of individual investors in the market.

Their study has also been cited in the book ‘Simple but not easy’ by Richard Oldfield.

I’ve extracted the following details from the above book.

These professors studied in details performance of 78,000 individual investors for the period 1991 to 1996.

They classified people on the frequency of their trading. Higher the trading higher would be the turn over. A 100% turnover means a portfolio was completely changed every year. 50% turnover means half the portfolio was changed in a year and so on.

The most active (in term of trading) 15,000 investors had a turnover of more than 100% and made average annual return of 10%

The least active 15,000 investors had a turnover of just 1% and made average annual return of 17.5%

There is an excess annual return of 7.5% for buying right and staying the course patiently.

This is one more example to reinforce why we always insist staying the course not only during ups and downs of market but also during the periods of underperformance of funds.

We’ve explained to you in the past why our churn would be less and most of the time it would simply be staying the course. Chaser is a loser. Studies shows even the best of the investors or fund managers underperform 30% of the time.

As I’ve often repeated, our main job is to make you stay the course at all times.

You’re all similar to the above investors who got more returns because of a very less churn and being patient.

This is your strength. Always focus on the same.