The academic evidence against stock picking & trading

Investing for beginners: Part 3 of 8

The media’s perception of the stock market includes researching stocks, analysing the annual reports of companies, and browsing r/wallstreetbets. But that’s only one side of investing in the stock market, and according to academics, it’s a bad place to start as an individual. Let’s first differentiate between stock picking and trading:

  • Trading – frequent buying and selling of stocks for short-term gains, usually over short periods of time (typically over a few minutes to a few months).
  • Stock picking – buying and selling of stocks for long-term gains. Holding time is much longer than traders, typically at least a year.

So what makes stock picking and trading so bad? There are two main things: the average individual investor underperforms the market over the long term and taking unnecessary risk.


When an individual investor tries to stock pick or trade, their goal is to beat the market. But what exactly is the market?

Market: the average performance of some group of companies. Examples include the Australian market by taking the top 200 Australian companies, the US market by taking the top 500 US companies, or even the Global market.

So how successful is stock picking and trading? Not very…

  • Odean (1999) analysed the records of 10,000 traders from 1987 to 1993 and found that they would get subpar results even before costs, as stocks they bought would on average underperform stocks they sold.
  • Barber and Odean (2000) analysed 78,000 stock pickers from 1991 to 1996 and found that the average stock picker underperformed the market after costs by -1.5% annually. Traders with a higher turnover performed significantly worse, underperforming by -6.5% annually.
  • Barber et al. (2009) found that the aggregate portfolio of individual investors from Taiwan underperformed the market by 3.8% annually from 1995 to 1999.
  • Chen, Kim, Nofsinger, and Rui (2007) analysed almost 47,000 Chinese investors from 1998 to 2002, and Grinblatt and Keloharju (2000) analysed trading from 1994 to 1996 in Finland. Both of these studies came to the same conclusion: investors tend to earn poor gross returns because the stocks they buy underperform the stocks they sell.
  • Hvidkjaer (2008) and Barber, Odean, and Zhu (2008) found that stocks heavily bought by individuals underperformed stocks heavily sold by individuals. Hvidkjaer (2008) notes the following: “In other words, stocks favored by retail investors tend to experience large and prolonged underperformance in the future, relative to stocks out of favor with retail investors.”

Despite all this evidence of the poor performance of individual investors, there have been numerous studies finding that the buying and selling activities of investors actually positively predict future returns over short time horizons. This contradiction gets cleared up by Barber, Lin, and Odean (2023), who found that the two are not mutually exclusive. Individual investors can both predict future returns over short time horizons and underperform the market in the short and long term.

Why do individual investors perform poorly?

Barber and Odean (2013) summarise the following factors that can contribute to the poor performance of individual investors:

  • Asymmetric information – trading for non-speculative reasons such as liquidity needs, rebalancing, or tax management needs.
  • Overconfidence – a belief that one knows more than one actually does or that one knows better than the average person. 
  • Sensation seeking – trading for entertainment or gambling purposes.
  • Familiarity – investing in geographically or professionally familiar stocks.
  • The disposition effect – the strong preference to sell winners to prematurely lock in profits while holding on to losers in hopes of better performance.

What not many people realise when they stock pick and trade is that the financial markets have a constraint where for every buy of a stock, there must be someone on the other side selling the stock and vice versa. This means that for someone to beat the market consistently, they need to be better than the majority of investors, which include professionals and institutions with significantly more resources and expertise. No wonder the average investor underperforms the market over the long term.

Unnecessary risk

On top of individual investors having poor performance, they are also undertaking more risk than is necessary. This is because by only investing in a handful of companies, the investor would have significant exposure to idiosyncratic risk, also known as uncompensated risk or company risk. Undiversified investors might also have high exposures to stocks from the company they work for, local stocks, and geographically or professionally familiar stocks (Barber and Odean, 2013). All of this leads to an unnecessarily volatile portfolio as opposed to a highly diversified portfolio.


As we have found from reviewing the academic literature, individuals who try to stock pick or trade are likely to underperform the market, induced by human irrationality and emotions, and take on unnecessary risk in the process. So if we shouldn’t invest in company stocks, what should we invest in? Well, if you heard the saying, “If you can’t beat them, join them”. If we are unlikely to beat the market, then why not invest in it?

I will cover this in my next article: Why index funds are the optimal starting point