1.5% timing penalty on stock buying

[George$]

There is an interesting article by Jason Zweig
"How to lose $9 trillion in a bull market" at CNN Money

He concludes with

Based on decades of data from 19 countries, Dichev thinks that the average investor incurs a "timing penalty" of 1.5 percentage points a year by buying high and selling low. Impatience will cost you dearly.

[banker]

There is an interesting article by Jason Zweig
"How to lose $9 trillion in a bull market" at CNN Money

He concludes with

Based on decades of data from 19 countries, Dichev thinks that the average investor incurs a "timing penalty" of 1.5 percentage points a year by buying high and selling low. Impatience will cost you dearly.

Thanks,

Good link George$,

Jason Zweig is one of my favorities to read. I recommend everyone read Jason's revised copy of The Intelligent Investor by Ben Graham. I think about it everytime I read someone posting about how a 100% equitiy portfolio will outperform (boring) more efficient portfolio's.

[always_learning]

With all due respect to Jason Zweig, in this case he has slightly misinterpreted the original source. (Ilia Dichev, The American Economic Review, Vol. 97, No. 1, March 2007)

I'm interested in this phenomenon, so I went to the original source.

Dichev's point is indeed that investors' dollar-weighted returns are systematically lower than buy-and-hold returns. By about 1.5% (average of 19 countries), as Zweig notes. And yes, capital inflow and outflow are responsible. Roughly, the phenomenon is that capital inflow tends to occur before periods of underperformance, and capital outflow tends to occur before periods of overperformance.

But Dichev's main point is that firms are successful at timing their purchases and sales of stocks. They have secondary offerings at high prices, and conduct stock buybacks and buyouts at low prices.

I take issue with Zweig's claim that the article is about investors' impatience. Zweig says:

Based on decades of data from 19 countries, Dichev thinks that the average investor incurs a "timing penalty" of 1.5 percentage points a year by buying high and selling low. Impatience will cost you dearly.

Individual investors' tendency to have poor timing when they flit in and out of stocks and funds is NOT what the article is about, and is NOT where the 1.5% number comes from. With that flitting, every buyer finds a seller, capital neither enters nor leaves the market, and the dollar-weighted return Dichev is talking about is unaffected.

I just think Zweig overstates his case a little bit and tries too hard to link the article to the well-known "flitting" phenomenon. Investors can't control firms' buyback policies, and have only partial control over whether to get bought out (sometimes they have to go along with the majority vote). Investors exercising poor discretion in purchasing stock in secondary offerings is very different from the impatient flitting in and out that Zweig has expertise about and so rightly criticizes elsewhere.

The thing that I find interesting is the way that company managers, presumably with inside information, act in a way that harms their shareholders to the tune of 1.5%/year.

Cheers,
a_l