The traders trap is alive and well.
Most traders over time tend to loose money on the SET as on other exchanges, or at best waste their time and energy.
While I don’t have this data on the SET in the US which has far high tax and other regulatory discouragements on trading, the NYSE turns itself over 100% in most years.
Evidence shows that broker besides client behavioral explanation are responsible for many of the interesting -but sad finding- regarding frequency of hyper trading. This is the long loosing long term trading strategy for too many here, not the SET per se. "Once burned, twice shy". It’s the key core reason why not more Thai’s and others save through responsible medium term SET investing.
Years ago I used to tell local brokers that their marketing officers should hold themselves out to be attempted “wealth creators”; this rather then just selfishly transactions focused. In time this so would generate a door to bigger besides new accounts. This so rather then disappointments and so a revolving door to the next chap. Over time clients would then remain clients and self acclaimed/determined traders would be told to be on guard. As is, too many savers disappear in time, only to then bad mouth the local stock exchange, instead of the faulty strategy.…so in time nobody there wins.
Few brokers listened and even less changed. I long ago gave up on trying to help on this. As I realize the entrenched local practice won’t change anytime and the regulators are lame.This even while many studies (not just from the US) and over many years, have confirmed that overall, day and short-term traders on average well underperform -and then some.
Recently a study showed that in Taiwan (another dominant trading place), individual investors losses there were equivalent to 2.2% of Taiwan’s grow domestic product, or 2.8% of the total personal income.* And not including all that time they spend doing it!
Why do frequent traders underperform? I won’t site all the studies as there far too many which show this just about unquestionably so, but consider just these 3 core reasons:
1) the disposition effect (sell out the winners, hold on to the losers), see more below.
2) the local bias (only own what you know -or where you live),
3) individual investor learning abilities (experience does seem to make one better), even while most traders are amateurs. Traders are also susceptible to behavioral biases such as overconfidence and self-attribution. These are behavioral explanations and are one reason why markets are far from efficient, more so in Thailand then many others.
Over confidence induces more trading but then often hurts investment performance -and Men on average act more confident, this is why some studies have shown Women to be better traders.* Yet, as I dare to have posted in our lounge on September 9th, ’10: “Its proven experience which counts here, not a women's touch. Very, very few women have become big portfolio managers -and I don't think its just because of sexism. Can women take a contrarian positions/views -as well as men? As this often is what is most needed, so to outperform stock markets. The grave dancer above the moribund consensus.” The question if Women on average are better investors/traders remains open -and I don’t claim to know the answer as I think its inconclusive.
Traders tend to be the social types. Using Health and Retirement study data authors provide strong support for their hypothesis that the more social household, those household who have more social interactions with the community (i.e. go to temples, churches, talk to neighbours, chit chat on the phone), are then substantially more likely to participate in stock market day trading. *
A study done by Barger and Odean (2001) concludes that trading activities pose significant costs to individual stock investors. “The finding that individual investors who trade more obtain lower net returns carries an important message for regulators and brokerage firms regarding the merits of encouraging individual trading”.
The disposition effect is one big reason why many novices -or over active stock investors- fail to do better. It is this tendency by most to hold on to loosing stocks while selling out (often too early) the winners. This is arguably one of the most studied patterns of individual investing. We are all guilty of it to some degree or another, perhaps in Asia more then in the West? Consider that realizing profits allows one to maintain self esteem, while realizing losses causes one to implicitly admit an erroneous investment decision, and hence is so naturally avoided. Yet studies here also give us some insights, namely that wealthier individual and people employed in professional occupations exhibit a lower disposition effect.*
Many of you know already that the Thai SET is 50% dominated by individual investors, and most are shorter term traders! Hence these behavioural actions, often irrational by a majority of individuals, have the potential to aggregate price distortions. And accumulate they surely do as we often witness how Thai shares exaggerate on the way-up and get dumped on the way down. This is typical of a market which is dominated by individual traders, whom for the most part look at graphs and call it “play”. Well, we can dare to say play: by “seat of their pants”.
Add to this queerness the ever big cap bias here, where institutions value share liquidity to an almost obsessive degree, and you got a marketbeast which is distorted, far from efficient and so perhaps easier to handle by experienced pros’, then a more rational market afar.
Best Regard,
Paul Renaud.
* See “Behavioral Finance”, page 522- 535 By Baker and Nofsinger (Published in 2010 by Wiley, 98 US$). While heavy reading, to the investor professional this is a hugely important book -as it shows why markets are often irrational.
