One Reason for Bad Performance of Retail Investors
Hong Kong Securities and Investment Institute Knowledge Portal, Nov 2013
3 Pages Posted: 16 Apr 2013 Last revised: 24 Mar 2014
Date Written: November 2013
Abstract
A lot of time, we heard that the stock market is dangerous, a lot of people lose money in the stock market. According to one of my friends who is an experienced investor with around 30 years of experience in the stock market and with an annual return rate for last 30 years around 15-16%, his feelings is that, out of ten persons invest in the stock market: 1 investor earns a huge amount of money, 1-2 investors are breakeven in the stock market without much gain or loss, 2-3 investors lose some money from the stock market, and the remaining investors lose huge amounts of money in the stock market.
According to a research done in Germany, similar findings as mentioned by my friend are found (Meyer, Schmoltzi, Stammschulte, Kaesler, Loos, Hackethal, 2012). 89% of the investors are with negative skill and with investment performance of approximately -7.5% per year return for gross return and -8.5% per year return for net return.
Honorable Peter Lynch proposed the fall knife theory for explaining this phenomenon in a tacit way. This research is to verify the claim of honorable Peter Lynch who explains the bad performance of a lot of retail investors is because they always invest at the inappropriate time, the falling knife theory.
Keywords: retail investors, falling knife theory, Peter Lynch, trend following, contrarian
JEL Classification: G00
Suggested Citation: Suggested Citation