Late last year, while most investors were nervously watching market volatility dominate the popular newsfeeds, a group of academics quietly published a little bombshell of their own on a research network.
I’ll admit, the title wasn’t exactly headline-grabbing stuff: "Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors." But the paper itself was fascinating. There were at least two qualities that made it a worthwhile addition to our evidence-based investment library.
First, this paper focused on the trading activities of the veritable cream of the crop: institutional portfolio managers overseeing portfolios valued at an average $573 million each. The database of their trades contained 4.4 million buys and sells across 783 portfolios between 2000–2016. So, lots of giant portfolios being steered through various market conditions by seasoned professionals who have made a career out of managing them.
Second, in addition to covering the more well-tread ground of stock buying skills, the researchers also looked at how these professionals went about selling their holdings.
How did they do? On the positive side, the study did find that the portfolio managers exhibited a “clear skill in buying.” An abundance of studies has found retail investors and your average bank broker fail to consistently achieve this feat, so that’s something. (We would like to see additional studies replicate this finding, but for now, we’ll go with it.)
Most strikingly, the study also found the managers’ selling decisions substantially underperformed on both a raw and risk-adjusted basis, “even relative to strategies involving no skill such as randomly selling existing positions.” In other words, they could have thrown darts at what to sell and done better than they did.
The paper suggests several possible reasons for the failure to properly launch a decent selling strategy. “The Evidence-Based Investor” Robin Powell offered a good summary of the reasoning in his own blog post here, so I won’t reinvent that wheel.
The take-away I’d like to leave you with is this: If the best-of-the-best professionals’ selling decisions are worse than throwing darts, it seems highly unlikely you, I, or your friendly neighborhood big-bank broker will be able to do any better.
Instead of riding on razor-slim odds of success, why not take the more obvious path: Reduce the number of buy AND sell trading decisions you must make.
The most obvious way of doing this is to not buy individual stocks (or individual bonds) in the first place. And skip letting your friendly big-bank broker do this on your behalf.