Picking stocks and investing is not as easy as it seems. There are many who go around thumping their chests because they think they can pick winners (yours truly included!). But real winners are few and far between for anyone. Only very few investors and the top ones do it most often!
One thing, however, is very clear to the smart investors (again, yours truly included – lol) that trading often and buying and selling at the drop of the hat is never a good strategy. Many people still do it – despite the fact that the best in the world have succeeded due to lesser trades as opposed to more. Buffett is legendary for not selling his stocks. He has sold very few. Now, a study confirms this for us:
In one study, Odean and his frequent collaborator Brad Barber looked at the buy and sell decisions of 78,000 households over a five-year period in the 1990s. When they divided the investors into those who traded more and less frequently, they discovered that “trading can be hazardous to your wealth.” Those who bought and sold most often earned a net annual return of 11.4 percent, whereas those who traded least often earned 18.5 percent (remember, the period studied overlapped with a significant bull market).
Barber and Odean note that the typical investor trades frequently, turning over 75% of his or her portfolio annually. They attribute this fact, and its unfortunate effect on the bottom line, to profound overconfidence on the part of individual investors. Picking winners is much harder than it appears to the average investor.
Most often people spend more time and do more analysis buying a pair of shoes worth $40 as opposed to buying $10,000 worth of stocks! Even the size of their investment doesn’t help them realize the context. Since an individual investor can really not take into account all the factors and so really good stocks are hard to come by, it makes sense to invest in few but really good stocks! And if you are in India, where long term capital gains tax from stocks is 0, it makes sense to go long on things!
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