Mar

21

Terrance OdeanTerry Odean is a Professor of finance at Berkeley's Haas School of Business. He has done several papers on the profitability of small investors and day traders. They are listed on his web page. Here is one:

"Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors" with Brad Barber, /Journal of Finance, /Vol. LV, No. 2, April 2000, 773-806.


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3 Comments so far

  1. Jack Damn on March 21, 2010 2:01 pm

    One of your links is broken. I believe you need to account for the spaces that are in the original title. This works

  2. Nick Pribus on March 23, 2010 4:39 pm

    A good friend where I used to work, upon my recounting a day trade made, said that the best day traders could do is match the market over the long term minus commissions. He was an asset allocator.
    My first “day trade” was Blockbuster Video in approximately 1990. It’s hard to remember now exactly and that was the era where you had to phone it in so it’s not on my computer. I did have a discount brokerage and it was $29.95 a trade up to 1,000 shares. I saw a news clip that Blockbuster had tanked 40% on the implementation of video on demand by a number of cable providers. But I had been to Blockbuster that week and it was empty, not of customers, but of movies. Customers were lined up out the door.

    So I bought 400 shares at approximately $10; or $4,000 so a 1/8 spread and two times $29.95 for the round trip is about 3% transaction cost. The paper cites 4% on average which is a fair comparison. Three days later I looked and Blockbuster was back at $12 or so (I used Prodigy to check online at the time). So I flipped it for an $800 profit, and was thoroughly jazzed at how easy it was. It may not sound like much to you big brain options trading master of the universe quant types, but to me, fresh out of university, it was a year’s budget for food, clothes, and entertainment.

    What I noticed from the article is that high frequency traders made approximately the same gross return; just that the transaction costs ate it up. The article is using the period 1991-1997, a bit after the period I cite above in my example.
    It may not be a relevant research period to compare to today, where you can do a round trip on 10,000 share of Citi for $15 and a one penny spread-about 0.3%, I guess that’s how a billion shares of Citi can trade in a day.

    Secondly, that period was a pretty strong bull market, day traders will have trouble in a uni-directional market, continually selling out of the upside, or buying ahead of the continued downside. Day traders make money on volatility.

    Third, in the internet age, the tools for trading are better accessible to all, and my first day trades were from when you had to go to the library and get Valueline research to make decisions-we little guys didn’t have a Bloomberg.

    All that adds up to a playing field that is much more in the favor of amateur stay at home day traders than ever before and the pool of those people have increased over the years. Since day trading is the ultimate pari-mutuel pool, it is still just gambling, but with the trading costs so low, gambling without a material rake by the house.

    But it is no game, I would say a lion share of the day trading profits go to the few who really do know what they are doing. The rest of the day traders out there who can scarcely calculate an IRR, and love the way writing a covered call “locks in a profit,” well, I recall a great line from “Rounders” where McDermott says “Listen, here’s the thing. If you can’t spot the sucker in the first half hour at the table, then you ARE the sucker.”

  3. Gary Rogan on March 25, 2010 12:36 am

    People who argue that one needs to invest in the averages always point out that the average non-investor in the averages loses, which seems undeniably true. It’s interesting to ask them what someone with a better-than-average track record should do, but they don’t like that question.

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