People have really bad timing when it comes to investing — really bad:
The New York Times summarizes a paper Dumb Money: Mutual Fund Flows and the Cross-Section of Stock Returns by two finance professors. The research, which covers the period 1980-2003, demonstrates that people tend to dump mutual funds just before the funds enter several-year periods of above-average performance, and to buy funds that are about to sag.The authors cleverly take the analysis down from the mutual fund level to the level of individual stocks, by calculating the change in ownership of a stock by mutual funds which is attributable investors switching into or out of particular funds. The stocks most sold by funds that investors were leaving showed a return of about 18% going forward, while those most bought by funds that investors were switching into came in at around 7.3%. The authors suggest that a strategy of buying stocks with the most negative flow while simultaneously selling short stocks with the most positive flow would have produced a 10.7% annual rate of return…while involving very low risk, since the strategy doesn’t involve a bet on the overall direction of the market. (Transaction costs excluded from rate of return; also, apparently, interest costs on the short positions.)