5/22/2012 7:40 PM ET|
Traders: Not as good as they think
A poll suggests that many active investors are convinced they’re beating the market even when the evidence suggests otherwise.
I can't decide if I am more surprised that 91% of the "active investors" polled at a recent Fidelity Traders Summit expect to meet or beat the market over the next year, or that 9% of the group actually expects to lose.
The rampant overconfidence evident in the poll, released this week by Fidelity Investments, shows hubris that investors should learn to avoid. Meanwhile, the small group of under-confident traders shows such poor recognition of the situation they are in that you must question their sanity.
Somewhere in the middle is a lesson for all of us.
To find it, we must first look at the Fidelity poll.
The poll was taken in mid-April during a Fidelity Traders Summit in Fort Lauderdale, Fla.; the summit was also webcast to more than 5,000 Fidelity customers. The majority of attendees and viewers were active investors, trading 36 times or more per year (which, at 1.5 trades per month, is not hyper-active, but is also more than your average buy-and-holder).
The group was optimistic in general, with half of the respondents believing the Standard & Poor's 500 Index ($INX) will close 2012 at 1,459 or higher, a gain of at least 10% from the benchmark's May 22 close.
They believe they will do even better -- 62% of the active investors say they expect to beat the market over the next 12 months, and an additional 29% expect to match the index. (That leaves the 9% of active investors who expect to lag the market.)
Two-thirds of the active investors say that their portfolio has matched or beat the S&P 500 over the last 12 months, which would be impressive if 80% hadn't made the same claim in 2011.
Now it certainly is possible that Fidelity has a group of above-average traders. Yet the Boston investment giant noted that investors opened more than 6,500 new Fidelity brokerage accounts per trading day during the first quarter, so it's also possible that some of these active investors are novices who are just figuring out this stuff.
Functionally, this is no different than surveys that ask people about their driving ability. In those, the vast majority of people consider themselves to be above-average drivers, which means it's the other guy causing problems on the road. In reality, nearly all drivers can't possibly be above average.
Skills and spills
Never mind that there is a difference between judgmental performance -- what you think you gained -- and actual performance, or that plenty of small-scale traders will sell winners to recognize gains but will suggest that all declines are "paper losses" because the stocks haven't been sold yet.
Ignore the strong likelihood that investors, when asked about performance, focused on winning trades to prove their ability to deliver strong returns in the future.
Active investors may be suffering from what's known as cognitive dissonance -- it is important for them to achieve superior results, but their own behavior may be short-circuiting it.
"We shouldn't be surprised by the results," said Terence Odean, a University of California-Berkeley professor who specializes in investor behavior.
"You are talking about active, engaged people who wouldn't be spending time at the trading summit or webcast -- who wouldn't be trading 36 or more times a year -- if they didn't think they were above-average investors," he said. "Even if they are not better than average, they pretty much have to believe they are just in order to do what they are doing, to be active investors."
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