Sunday, February 14, 2010

ZWEIG: High Trading Is Bad News For Investors

Buy-and-hold hasn't looked too good lately, but churn-and-burn is no better.

Stocks are sloshing around faster and cheaper than ever. You can trade online for $7.95 or less. Nearly 2 billion shares are handled daily on the NYSE, not counting trades in rival markets. Throw those in, and trading is a tidal wave, averaging 9.4 billion shares so far in February—up from 9.1 billion in January, says Rosenblatt Securities.

Pause before you plunge. Trading costs money, raises your tax bill and can reinforce bad habits. As Benjamin Graham defined it, investing requires "thorough analysis" and "promises safety of principal and an adequate return." Trading on rumors, hunches or fears is antithetical to investing.

Mr. Graham insisted that "the typical individual investor has a great advantage over the large institutions"—largely because individuals, unlike institutions, needn't measure performance over absurdly short horizons. The faster you trade, the more you fritter away that advantage.

A new study by Mercer, the consulting firm, and IRRC Institute, an investing think tank, asked the managers of more than 800 institutional funds how often they traded.

Two-thirds had higher turnover than they predicted; on average, they underestimated their turnover rate by 26 percentage points. Even though most are judged by performance over three-year horizons, their average holding period was about 17 months, and 19% of the managers held the typical stock for one year or less.

One vehemently denied being too focused on the short term, complaining that hedge funds "have caused market-wide turnover to increase" and that "retail investors tend to look at short-term performance and move in and out of funds" too quickly.

Those who live in glass houses shouldn't throw stones; this manager, according to Mercer, holds the typical stock for about 27 weeks at a time.

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