Individual Stocks are Bad
There’s a post on the Moolanomy site about the subject of investing in individual stocks. Which makes a couple of statements worth addressing.
The first is:
…no one should own individual stocks
You might think I’d argue against this particular statement, but I won’t. Speaking strictly from an investment point of view (as opposed to trading), holding individual stocks is probably not something most people want to do. It takes a sizeable portfolio to be able to create a well diversified portfolio (like 30), which is difficult for many individuals to reach. That means ETFs and mutual funds tend to be the better choice.
Here’s the other bit I wanted to comment on:
One of their studies found that the stocks individuals buy underperform after they buy them and outperform after they sell them. This is actually a commonsense outcome. The reason is relatively simple. Let me explain. For every buyer there must be a seller. Since the vast majority (about 80%) of the trading is done by institutional investors (who almost certainly know more than the individual investor) that it is likely that when an individual buys a stocks (because he thinks it will outperform the market) the likely seller is an institution (who thinks it will underperform or they would continue to hold it). And the institutional investor is more likely to be right.
The institutional investor is more likely to be right? Hmmm…. I’m not entirely sure of that, but there are a couple of links in the post to research which are said to support these statements. You may want to check them out. I haven’t had the time to do so as yet, but do wonder whether the academics of it are overly narrow as is often the case in situations like this.
Again, this is investing talk, not trading talk. There’s no suggestion here (especially from me) that trading individual stocks is a bad idea.
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2 people have left comments
Posted on March 10, 2009 at 9:30 am
Pinyo wrote :
Thank you for your interest in the article. Just a bit of correction in the second part. Larry states that institutional investor is more likely to be right — not individual investors.
Posted on March 10, 2009 at 9:50 am
John wrote :
Thanks Pinyo. Whoops! Corrected now.