A Case for Buy/HoldD INTRO: Almost since the beginning of the stock market there has been a debate over which is the more effective strategy, active trading of stocks or buying and holding for the long term. Recently the results of an extensive study have shed some light on investment decisions and the psychology behind them. Bruce Hagan, certified financial planner with RAI Investments and Corporate Securities Group is with us to share those findings. Q1: Bruce, who headed this study and how was it conducted? A1: An associate professor of finance at the University of California at Davis named Terrance Odean was allowed to review the investment records of a brokerage firm. He studied the behavior of investors in 78,00 households across the country - looking at all aspects of their purchases and sales of common stock. Q2 What were some of the questions this study was trying to answer? A2: Primarily he wanted to determine if frequency of trading, as measured by portfolio turnover, had an impact on investment results. He also wanted to determine if there were common investment mistakes that could be identified. Q3: Let’s start with frequency for trading. What were the findings? A3: He found the typical investor turns over about 75% of household’s portfolio annually. At that level net return is about 3.7 percentage points less than a broad index of stocks. He found that when portfolio turnover exceeds 200% a year, the annual net return trail the market index by 10.3 percentage points. So, his conclusion is that active trading is hazardous to your wealth. Q4: Interesting. Was he able to identify common mistakes? A4: Yes, his results indicated trading frequently is a common mistake but also he found that investors tend to let go of winners and hold on to losers. I learned that in psychological terms this in known as the disposition effect. Q5: Was there some attempt to explain why people behave this way? A5: Yes, Odean blames overtrading on a healthy dose of overconfidence. Apparently many people believe they’re smarter than the average bear and can do better than the market averages by trading a bit more aggressively. Most traders take too much credit for their successes. His study indicated that more experienced investors tend to learn form their mistakes and have a more realistic self-assessment. They tend to over time trade less. Q6: What about the tendency to hold your losers? A6: Pretty easy to explain. People simply don’t want to admit their mistakes. They go into what Odean call "regret avoidance". By not unloading lousy stocks, an investor avoids the obvious pain associated with selling at a loss as well as the potential pain of seeing a stock that he’s dumped turn back around. Q7: So the lessons to be learned are don’t trade very often and don’t stick with a loser indefinitely. A7: Absolutely. Being disciplined about taking losses and redirecting those funds rather than holding and hoping is rational but hard for people to do. Q8: Do you think a large number for investors will learn from studies such as this? A8: Your dealing with investor psychology & attitudes & those are areas that are hard to effect change. The discussion offered above and in the movie should not be considered an endorsement by Florida State University. They are offered in the educational sense of providing thought-provoking information for our Web audience. Copyright shared with Florida News Channel (FNC), all rights reserved. Broadcast 10/8/99