month—went from beating the market to underperforming it by an
abysmal 6.4 percentage points per year. The most patient investors,
however—who traded a minuscule 0.2% of their total holdings in
an average month—managed to outperform the market by a whisker,
even after their trading costs. Instead of giving a huge hunk of their
gains away to their brokers and the IRS, they got to keep almost
everything.^7 For a look at these results, see Figure 6-1.
The lesson is clear: Don’t just do something, stand there. It’s time
for everyone to acknowledge that the term “long-term investor” is
redundant. A long-term investor is the only kind of investor there is.
Someone who can’t hold on to stocks for more than a few months at a
time is doomed to end up not as a victor but as a victim.
THE EARLY BIRD GETS WORMED
Among the get-rich-quick toxins that poisoned the mind of the invest-
ing public in the 1990s, one of the most lethal was the idea that you
can build wealth by buying IPOs. An IPO is an “initial public offering,”
or the first sale of a company’s stock to the public. At first blush,
investing in IPOs sounds like a great idea—after all, if you’d bought
100 shares of Microsoft when it went public on March 13, 1986, your
$2,100 investment would have grown to $720,000 by early 2003.^8
And finance professors Jay Ritter and William Schwert have shown
that if you had spread a total of only $1,000 across every IPO in Janu-
ary 1960, at its offering price, sold out at the end of that month,
then invested anew in each successive month’s crop of IPOs, your
portfolio would have been worth more than $533 decillion by year-
end 2001.
(On the printed page, that looks like this:
$533,000,000,000,000,000,000,000,000,000,000,000.)150 Commentary on Chapter 6(^7) Barber and Odean’s findings are available at http://faculty.haas.berkeley.
edu/odean/Current%20Research.htm and http://faculty.gsm.ucdavis.edu/
~bmbarber/research/default.html. Numerous studies, incidentally, have
found virtually identical results among professional money managers—so this
is not a problem limited to “naïve” individuals.
(^8) See http://www.microsoft.com/msft/stock.htm, “IPO investment results.”