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The Cost of Bad Buy/Sell Decisions
Infographic by Jemstep

Category: Digital Media, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “Cost of Bad Buy/Sell Decisions”

  1. ottnott says:

    Barron’s says 85% of all “sell or exchange decisions” (whatever that odd phrasing means) are incorrect.

    So, there’s no counterparty with an 85% correct record?

    More seriously, assuming that the infographic is largely accurate, where are all the boring, low-cost funds that outperform the SP500 over time with boring and emotionless diversification and rebalancing?

  2. [...] Bad Buy Sell Decisions This entry was posted in Thoughts and tagged thoughts. Bookmark the permalink. ← If You Had Everything Computationally Where Would You Put it, Financially? [...]

  3. wally says:

    Long term it is… I’m sticking with U S Steel, Kodak, Enron no matter what they say.

    And there’s the trouble with these analyses: when they look back they never select the dismal loser portfolios, only those that survived and prospered.

  4. MayorQuimby says:

    Useless statistics since they are based upon recent stock market closing price.

    If we swoon 25%, then these numbers become irrelevant as that 8.4% will drop sharply (as will the other).

    Relatively speaking though, they do make a point.

  5. VennData says:

    Wally, you’re buying individual stocks. Forget them, buy indexes. also it’s not buy and hold, it’s buy, hold and re-balance.

    See when you buy you have a fifty/fifty shot at being wrong. Plus costs. Then when you sell, fifty/fifty again. The costs really kill you ottnott. You lose a little on each transaction, so in aggregate, all investors lose… that’s why those market makers have such cavernous HQ’s.

    Think in terms of aggregates. You’re just another node hooked up to the machine, the market. What you sell someone buys and vice versa. Since you really have no idea whether what you’re doing is going to earn you more than the market, you are making a fifty fifty wager each and every time. But paying the croupier

    No, you can’t “Guess” that it’s time to get out get back in, or out. There’s no way to know. None. Look at your performance for evidence. Buy, hold and re-balance once a year. That’s it.

  6. Lyle says:

    So why not the Boogle approach, but index funds and hold (either S&P 500 or total market). You do give up on the chance to beat the market and get rich quick but … Of course then you want the lowest cost index funds to boot. Its sort of a don’t fight the market in the end you will loose. But then of course a lot of folks in the investment community will have to find a new career as they will become redundant.

  7. denim says:

    But if one actively manages an S&P 500 indexed ETF on a moving average basis, it may even be better…or so it would appear from Doug Short.
    “Buying and selling based on a moving average of monthly closes can be an effective strategy for managing the risk of severe loss from major bear markets. In essence, when the monthly close of the index is above the moving average value, you hold the index. When the index closes below, you move to cash. The disadvantage is that it never gets you out at the precise top or back in at the very bottom. Also, it can produce the occasional whipsaw (short-term buy or sell signal), such as we’ve experienced this summer. ”
    The big chart:

  8. alanvw says:

    Total crap – saying that most buy/sell decisions are wrong will depend on the current circumstances and known information at the time of the decision. Going back later and saying it was wrong is pointless. As Wally calls out above, this is survivorship bias and fitting the data to support the long term view.

  9. denim says:

    And a back test of the managed Ivy Portfolio yields this gem

  10. charlie1939 says:

    It is interesting to see the use of different time frames to try to prove a point! For example, the creator compared returns of the S&P over a 20 year period, 1988-2008, with those that the “average” investor ‘s “buy high and sell low” strategy and then used a different time period, 200-2008, to support his/her argument for a plan including periodic re-balancing of a “reasonably diversified” portfolio. Of course the S&P over this time frame did nothing except advance and decline in a narrow band. I have found that it is usually possible to prove just about any theory if you select the supporting data carefully.
    In fact, I imagine that the proof of the efficacy of the plan including re-balancing a “reasonably diversified” portfolio would be equally true if the creator of the graphic had the integrity to use the same 20 years ending in 2008 time period.

  11. HG says:


    I am an avid reader and follower of Big Picture, recommending it to many colleagues in the local chapter of the American Association of Individual Investors. But I became very upset when you publicized mis-information that the mutual fund industry has been pumping for years.

    In the “Cost of bad buy/sell decisions” article, the oft-quoted Dalbar statistic that “the average stock-mutual fund investor averaged just 1.9% annual return over 20 years ending 2008″, with the narrative attributing the poor results to market timing. That’s like condemning “swimming” because an untrained person drowned in the motel swimming pool. Obviously, it’s better to advocate learning how to swim, rather than telling people to stay out of the water (or to let a mutual fund manager produce below-index returns and massive draw-downs for you).

    The “Cost of bad buy/sell decisions” article should have pointed out that barely a dozen mutual fund managers outperformed the market averages every year for a 10 year period. That fact really shows the cost of bad buy/sell decisions to the individual investor and why Jack Bogle has been so successful.

    Clearly, market timing does not work if one does not know how to do it. But Mebane Faber and his IVY portfolio has clearly proven that disciplined, simple market timing produces above-index returns with far smaller maximum draw-downs. I recall that you, Barry, commented fairly recently on the merit of using a 10 or 12 month moving average to “stay out of harm’s way”.

    Also this piece cited the old and no longer true Ibbotson-derived observation that “90% of your portfolio’s volatility comes from your asset allocation”. In the March 2010 issue of the Financial Analysts Journal, Ibbotson reported that “about 3/4 of a typical fund’s variation in time-series return comes from general market movement, with the remaining portion split roughly evenly between the specific asset allocation and active management.” In other works, adjusting positions to keep the tail winds behind you, not asset allocation nor stock picking, provides most of the gains.

    It is good to get the facts straight and provide honest, objective information. The Big Picture usually does, which makes this incident so disturbing.



  12. Heh heh — Just had dinner with Meb last week in LA
    (We are revisiting an old paper of his)

    As to the under performance, market timing is the wrong word.

    However, I’m sorry to tell you that mutual fund investor underperformance has been thoroughly documented, and tracks back to 3 factors:

    1) 80% of active fund managers underperform each year
    2) Hefty fees — typically 2-3%, but as high as 5.5% — are a huge drag on returns
    3) Investor Behavior typically has them chasing hot funds and dumping cold ones — just before the mean reversion occurs

    So you are correct — blaming it on market Timing is an inartful selection of words. But investor (and manager) behavior are a significant part of the issue

  13. machinehead says:

    What exactly ARE these “conservative,” “moderate” and “aggressive” diversified portfolios, charted in orange, blue and green, respectively?

    As a wild guess, “conservative” probably holds more bonds than stocks; “moderate” about 50/50; and “aggressive” about 60% or 70% stocks.

    But without definitions, the charts mean little. The compounded annual return on the best of them (“conservative”) was a mild 5.92% over the 11-year period. A small allocation to gold could’ve boosted that. But Wall Street has stocks and bonds to sell, so that’s what they sell.

    Stocks and bonds; Democrats and Republicans … so many choices, comrades!

  14. machinehead says:

    What exactly ARE these “conservative,” “moderate” and “aggressive” diversified portfolios, charted in orange, blue and green, respectively?

    As a wild guess, “conservative” probably holds more bonds than stocks; “moderate” about 50/50; and “aggressive” about 60% or 70% stocks.

    But without definitions, the charts mean little. The compounded annual return on the best of them (“conservative”) was a mild 5.92% over the 11-year period. A small allocation to gold could’ve boosted that. But Wall Street has stocks and bonds to sell, so that’s what they sell.

    Stocks and bonds; Democrats and Republicans … so many choices, comrades!

  15. Frilton Miedman says:

    Mark Hulbert’s logic – 1 in 3 odds a given analyst, newsletter or market timer is wrong.

    They’re either, 1 -Lying, 2- Wrong, 3- Correct.

    He takes a consensus, then bets against it.

    He has a decent track record.

  16. Mr Objective says:

    Doesn’t this main stat (1.9% investor return vs. 8.4% s&p500 return) disprove the Efficient Markets Hypothesis as far as markets being random? If markets are random, market timing decisions would average out to no effect (other than transaction fees and simply missed time from the market).


  17. victor says:

    OK ,giants such as Ben Graham and John Bogle are helpful for investors. Of course stock market data are not really suitable for meaningful statistical analysis, the most basic requirement-random data source- does not exist. Stocks vs. Bonds? Even Graham cautions that there is no guarantee stocks will outperform in the future. This is a huge subject, no silver bullets. But the message of the article is on the whole well taken.

  18. constantnormal says:

    All good criticisms … I’d like to expand MayorQuimby’s point regarding a single interval ending now.

    The 20 year part is suspect, as that is how far back they had to go to find a starting point that was sufficiently below where we are today. A 5 year interval would have definitely produced a different picture in this contest, as both would be showing losses, as would a 12-year interval. It took almost 30 years for the DJIA to match its highs from the late 1920s, with a buy-and-hold model holding losses for all that time.

    There are times when buy-and-hold makes sense for the individual investor, such as during long bull market runs. In these periods, holding stands a much better chance of being the correct action. While there may be those who claim that we are in another long bull market presently, that is a debatable question. If we are not in another long bull market run, then some other strategy makes more sense.

  19. [...] but I don’t often post infographics on Abnormal Returns. However this infographic, hat tip Barry Ritholtz, on the high costs of bad buy/sell decisions parallels a number of points we make in our new book [...]

  20. bonzo says:

    How can the “average” investor dollar get below-average returns? It can’t. Now certainly, the average investor, in the sense of a human rather than a dollar, can get below market average returns. What this implies is that the distribution is skewed. A large number of dumb money investors is getting poor returns, while a much smaller number of smart money investors is getting excellent returns, and the market average is somewhere in between. Nothing says small individual investors can’t be smart money.

    The key to being smart money is to find dumb money to take the other side of the bet. There is no dumb money doing Exxon-Chevron relative-value trades, so there is likewise no way to be smart money with such trades absent inside information. Whereas, there is a huge amount of dumb money buying stocks after a big run-up (like now) and selling right at the bottom (like back in September of last year). Taking advantage of that huge amount of dumb money doing market timing the wrong way (buy high, sell low) is not particularly difficult.


    BR: The average investor can under-peform the benchmark indices; you can also have a skewed distribution, with a small amount of very high out performers and the masses getting returns that are below median.

  21. bonzo says:

    You didn’t read my first sentence carefully. What I was trying to say is that for every DOLLAR (not investor) of negative alpha, there must be a dollar of positive alpha (disregarding trading costs). It is impossible for the average invested dollar (as opposed to average or median investor) to get anything but the market average. The rest of my comment agrees with what you are saying.

    Bottom line, whenever you see charts like the one above or read John Bogle spouting off about how the average mutual fund investor loses at trading, you should think: if all these dummies are consistently losing a zero-sum game (disregarding trading costs), other smarter people must be consistently winning that same game–how do I join the smart group?