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Monday, March 27, 2006

Can Individual Investors Beat the Market? (by Coval, Hirshleifer, & Shumway)

Craig Newmark of Newmark's Door points us to a very interesting article, by Coval, Hirshleifer, and Shumway, titled "Can Individual Investors Beat the Market?". Using a sample of individual investors' trades, it provides evidence that some investors consistently beat the market. This seemingly contradicts the idea of market efficiency. Here's the abstract (emphasis mine):
We document strong persistence in the performance of trades of individual investors. The correlation of the risk-adjusted performance of an individual across sample periods is about 10 percent. Investors classified in the top performance decile in the first half of our sample subsequently outperform those in the bottom decile by about 8 percent per year. Strategies long in firms purchased by previously successful investors and short in firms purchased by previously unsuccessful investors earn abnormal returns of 5 basis points per day. These returns are not confined to small stocks nor to stocks in which the investors are likely to have inside information. Our results suggest that skillful individual investors exploit market inefficiencies to earn abnormal profits, above and beyond any profits available from well-known strategies based upon size, value, or momentum.

You can download the article off SSRN here.

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