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Fungus and snowboarding

This article originally published in The Northern Daily Leader on 16 February 2013.

The world owes a lot to the efforts of researchers and scientists. Imagine life without the exertions of countless thousands of students, scientists, academics and other people who devote their time to solving research puzzles. No TV, antibiotics or internet and almost everything else we take for granted. Of course some of the questions they try and answer can be a bit baffling. My wife Liz, for example, spent the three years of her PhD studying the abilities of a fungus which grows on sheep and cattle dung. Apparently the fungus could be used to eat worms which infest the stomach of sheep and cattle, but nobody knew the conditions under which the fungus performed the best. And that kept her busy for those three years. I offered to proof-read her thesis before it was submitted and it was the best cure for insomnia I’ve ever found.

To be fair, her thesis topic wasn’t the strangest that I’ve seen – a priest in the UK was recently awarded his PhD on the topic of snowboarding. He spent four years studying the similarity between religion and the ecstasy that snowboard riders apparently feel as they hurtle down the ski-slopes. Nobody’s saying it was a handy excuse to spend all his time hanging out at ski resorts! Not all research is as obscure as this however; many research efforts are aimed at solving more mundane problems. One of the most significant research papers in finance was published in 2000 by two researchers, Barber and Odean. The title of the paper was striking – “Trading is hazardous to your wealth: The common stock investment performance of individual investors”. The authors had gained access to the share trading records of 78,000 households in the US, over a six-year period ending in 1997. These records covered over 2 million individual share purchases or sales, representing over $24 billion worth of transactions. They then segmented the accounts based on how often the owner bought or sold shares. What they found was that people who bought or sold shares on a frequent basis had an average annual return of 11.4% over the six years. However, people who seldom bought or sold shares (i.e. your typical long-term investor) had an average annual return of 18.5%. That variation doesn’t sound like much, but if you started with $1 million, it’s the difference between ending up with $1.9 million or $2.8 million.

It really is that simple. Real evidence exists that the more you trade, the worse your returns will be. There are no doubts about it. So if you invest, or somebody else does it for you, think about how often and why you trade. The answer may mean the difference between a holiday in Texas, QLD, or Texas, United States.