Attention, Single Men: Stop Trading So Much

Beyonce recently topped the Billboard Hot 100 chart with a multi-platinum anthem for all the single ladies. I thought some of the men out there may be feeling a bit left out, so I composed a little ditty of my own. Here it goes:

All the single men, all the single men
All the single men, all the single men
All the single men, quit trading your stocks so damn much. Oh, Oh, Ohhh.....
(Insert killer dance moves)

That's all I've got so far. Good stuff, right? It's kinda catchy and, all kidding aside, I may have just done you a big favor.

Can I send you my demo?
The sad truth is that men (and single men in particular) persistently overtrade stocks, leading to well-documented underperformance. Surprised? You shouldn't be. It's all thanks to a baffling combination of impatience and overconfidence.

Pay attention, because this is information you'll want to hear.

According to an oft-cited study by Brad Barber and Terrance Odean, men trade an unimpressive 45% more than their female counterparts, earning them annual net returns of -- get ready -- 1.4% less than the ladies. Worse still (for unmarried guys like me) is that single men trade a whopping 67% more than single women, earning them annual net returns of 2.3% less! The authors cite increased trading costs, taxes, and a greater tendency to speculate as reasons for this underperformance.

The unexpected great investors
To illustrate this seemingly minor but actually substantial performance gap, let's say you and your female friend both start out with $10,000 apiece. She allows herself to earn the market's historical return of 10.8% per year for 10 years. You, on the other hand, insisting that you're a savvy trader, trade 65% more, and, as a result, you earn only 8.5% per year on your money.

At the end of 10 years, she has amassed a notable $27,900 (without adding any new money). Meanwhile, you're sad to discover that you've only got $22,600 to your name. Poor show.

Now, imagine this problem exacerbated by greater lengths of time and larger amounts of capital added to the equation. This smallish earnings gap would begin to expand at a mind-boggling rate.

Why you think you are better
There are a number of theories as to why men trade more often -- none of which are terribly shocking.

Many believe that men trade more often because they are generally more interested in the stock market and thus spend more time around stocks, the financial media, and their brokers. Others believe that the answer is written in our biological past -- some nonsense about hunters and gatherers. But the real reason has a lot more to do with the dastardly combination of plain old impatience and undeserved overconfidence.

That's not to say that women are never impatient or overconfident -- but when it comes to money, guys tend to convince themselves that they are the master.

And the truth is that it doesn't really matter why we trade so much more often. It matters that we do trade more often. And it matters that it hurts us as investors.

Say it with me: "It's not my fault!"
A quick examination of the investment world (run largely by men) reveals a chronic proclivity toward overtrading, especially at the big Wall Street banks. Take a look at some of the more popular stocks out there and the number of Buy/Sell/Hold decisions active in the last month:

Company

Buy

Hold

Sell

Cisco (Nasdaq: CSCO  )

17

13

0

Bank of America (NYSE: BAC  )

6

10

3

PepsiCo (NYSE: PEP  )

9

4

0

Caterpillar (NYSE: CAT  )

4

15

2

Carmax (NYSE: KMX  )

0

10

2

Walgreen's (NYSE: WAG  )

7

11

1

Yahoo! (Nasdaq: YHOO  )

8

22

4

*Data provided by Thompson/First Call.

When we see so many conflicting opinions changing on a frequent basis, of course it feels natural to trade a lot. It's ingrained in our larger investment culture. The big boys do it (at the banks), they make a lot of money (at least, they used to), and as humans we like to imitate authority figures.

The only problem is: It just doesn't work.

The great minds of the investing world confirm that if you plan on beating the market, you should avoid overtrading. Barber and Odean can prove it once again. The pair discovered that the 20% of American households that traded the most (turnover of about 250% per year) vastly underperformed an entire group of more than 66,000.

Who benefits?
A more serious examination of this trading culture of ours explains why investment houses (and the media too, to some degree) are so motivated to have us trade frequently: They get paid more for doing so. Many stock brokers are paid on commission. If you don't trade, they can't buy that sweet Porsche that they've been eyeballing.

The problem for you is that an overly active trading strategy is far less likely to help you consistently buy low and sell high and far more likely to:

  1. Leave you on the sidelines when the market has really big days.
  2. Generate tremendous costs in commissions and taxes.
  3. Benefit people that you don't necessarily like.

That's a central fact of investing. And, unfortunately, these poor practices seem to have become so mainstream that no one feels comfortable questioning them.

But question them I do
If men (and all investors for that matter) really want to start doing their portfolio a solid, they must resist the urge to constantly turnover their portfolio. The practice is unnecessary, benefits the wrong people, and prevents money from growing in the most efficient manner possible.

Take a hint from the Motley Fool Stock Advisor, service where recommended portfolio turnover is "glacial," as analyst Matthew Argersinger puts it. In seven years of action, the service continues to crush the market by more than 28 percentage points -- without requiring constant trading. The service is free for you to try for 30 days by clicking here.

Nick Kapur generally prefers to avoid the musical stylings of Beyonce. He doesn't own shares of any companies mentioned in this article. CarMax is an Inside Value pick. PepsiCo is an Income Investor selection. The Motley Fool is investors writing for investors.


Read/Post Comments (12) | Recommend This Article (29)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 07, 2009, at 8:52 AM, hawkwand wrote:

    Polysyllabic Vocabulary: Ach, du Lieber! "Do you understan the words coming outta my mouf?" It is "exacerbated" NOT "exasperated", ya fool!

  • Report this Comment On March 07, 2009, at 12:13 PM, lotontech wrote:

    When you say "She allows herself to earn the market's historical return of 10.8% per year for 10 years." I assume you're not talking about the last 10 years -- which have returned approximately 0% (ignoring dividends).

    And not the period between 1929 and 1954 when apparently it took 25 years for pre-crash portfolios to recover their previous levels (ignoring dividends).

    Maybe "Timing is Everything!".

    Not dipping in and out, but looking for the Big Swing.

    -----

    Tony Loton, Financial Author and Publisher

    -----

    Phrases I like to Google:

    "Don't Lose Money!"

    "Do Dividend Yield, P/E, and PEG Really Work?"

  • Report this Comment On March 07, 2009, at 5:27 PM, redclaymud wrote:

    It's a guy thing. Size matters to guys and I guess some of us have a higher level of the testosteronal stock trading hormone.

    I realized I needed to seek help when E-trade notified me that I made enough trades last quarter to qualify for their frequent trader discount. Ouch! The news couldn't have hurt my trading ego more. This is totally unMotley Foolish.

    But in looking at the numbers. I bought low and sold higher. It was all for small gains of 10-15-20%. Funny thing is, I could purchase the same stocks yesterday for about the same or less than my first purchases.

    Am I the only one who made quick money on GM when it tanked the first time? I doubt it. There is a time to buy and hold and a time to ride the tidal waves. I rode the outgoing tidal waves for three months and now the tide is starting to return. That's good news for buy and hold.

  • Report this Comment On March 07, 2009, at 8:16 PM, thisislabor wrote:

    never heard//knew that before. thanx

  • Report this Comment On March 08, 2009, at 12:22 AM, ButterflyS6 wrote:

    Excess trading costs and market underperformance are far cheaper than getting married. Seems like the single men are on the right track.

  • Report this Comment On March 08, 2009, at 2:44 PM, PennyPincher12 wrote:

    Sounds logical.

    Sheila Bair said the same thing on Cramer and Burnett's town hall meeting.

    Said her mom bought and hold and her dad was a frequent trader. Mom ended up with the money.

  • Report this Comment On March 08, 2009, at 2:54 PM, Hudarios wrote:

    How tiresome to see yet another story about how men and women behave differently, with the inevitable conclusion that men are less capable. As long as fool.com has taken to contrasting men and women, I'd like to point out here that these same risk-taking men are overwhelmingly responsible for creating corporate America and the stock market in the first place.

    I also think Butterfly's point is hilarious!

  • Report this Comment On March 08, 2009, at 3:50 PM, lordmorgul wrote:

    Hodarius, the article does not conclude that men are less capable, but that they need to recognize that a trend shows they MIGHT have something to improve on. Clearly not all men over-trade, and some probably do over-trade and come out on top all day long despite the higher costs of doing so. That doesn't mean everyone should follow suit, and the observed trend is something of interest to anyone wanting to become a better investor (myself for instance).

    Butterfly's comment is hilarious; as a single guy I'm looking forward to reducing my financial worth someday though!

  • Report this Comment On March 08, 2009, at 5:46 PM, 72SIGAR wrote:

    I agree with Butterfly, trading stock and pay comish costs are nothing compared to getting married or having a wife. Every married man I know is a complacent mindless shoe, that his wife tells him what do do with "their" money. Pointless article. Trade, study make investments and stay single. An average wedding costs 30K. Put that in the market. and invest. In the lomg run you'll get a better return.

  • Report this Comment On March 08, 2009, at 6:45 PM, thisislabor wrote:

    Butterfly's comment is hilarious; as a single guy I'm looking forward to reducing my financial worth someday though!

    ...

    love's expensive : /

  • Report this Comment On March 10, 2009, at 9:10 AM, jakellis wrote:

    I'm not so sure about marriage costing more than the fees for overtrading. I just got married March 8th, and it cost us a total of $300, church, preacher, dress, reception, the whole bit. At what some brokerages charge per trade, I think I could spend more than that easily if I wasn't paying attention.

  • Report this Comment On July 29, 2010, at 5:38 PM, mtracy9 wrote:

    "The stock market is designed to transfer money from the Active to the Patient." --Warren Buffett

    "If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes." --Warren Buffett

    http://shouldersofgiantsinvestor.com

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