The Lake Wobegon effect

Paul Farrell at Marketwatch mentions the Lake Wobegon effect as it applies to the stock market (link).

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On Lake Wobegon "all the women are strong, all the men are good-looking and all the children are above average" says the great American satirist Garrison Keillor in his "Prairie Home Companion" world.
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“63% of Americans consider themselves more intelligent than the average American, a statistical impossibility. In a different survey, 70% of Canadians said they considered themselves smarter than the average Canadian.” But when it comes to financial markets, its closer to 100% ...


I'd guess almost all the readers of my blog consider themselves above average in intelligence, and above average in investment acumen. While that may be true for small samples, by definition, most people are some what average.

The Lake Wobegon effect reinforces the illusion that more activity will generate more return. In the stock market the reality is the opposite, the average active small fish trader usually does worse than the static investor, that may do buy-and-hold or dollar-cost-averaging. On the Internet, the tendency is for big winners flaunting their stories, often filled with lies, the big losers are never heard from.

Here is a second Farrell article "The more you trade the less you earn" (link2).
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Behavioral finance researchers have studied the performance of stock market traders in both America and Asia. Interestingly, they discovered that traders in both countries under-perform the world’s broad markets by significant amounts. One study analyzed 66,400 accounts at a major Wall Street firm over a seven-year period. Another studied all the active traders on the Taiwan, China exchange.

In spite of the cultural differences, the results were virtually the same. Why? Due to the high transaction costs, taxes and bad decisions, the bottom line is simple: “The more you trade the less you earn.” In fact, about 80% of all day traders lose money. In researching the Americans, the study found that the active investors who turned over their portfolios 258% annually made less than 12% on their money. Passive investors who bought and held, with only 2% portfolio turnover, had average returns of roughly 18%, which is about fifty percent higher than the returns of the active investors. Still, investors believe they can “beat The Street,” simple because the Wall Street “Hype Machine” has programmed them to believe that myth.
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As for the stock market, the Monday morning rally failed. Support for SPY at 108 and then at 104. TLT may be breaking out to new highs. It is difficult to want to buy treasury bonds with yields so low, but the chart, and seasonality point to more strength in bonds.