Trading Winning Streaks Versus Trading Losing Streaks

Trading Winning Streaks Versus Trading Losing Streaks

This is a Guest Post by AK of Fallible.

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We’ve known for a while that investors react differently to gains and losses, but recently there have been new developments. In a paper by Essentia Analytics called Holding The Line, they revealed the results of a new study that tracked investors over a period spanning ten years to find out how winning and losing affects short-term performance.

Here are a few of their findings (taken from the paper):

Over half of PMs changed their behavior in one way or another when on a streak. Nearly one in four changed it when winning, and 41% changed it when losing

When managers were on a winning streak, the majority of them traded less often and made fewer decisions. That’s just as well, because the decisions they make when on a winning streak tended to destroy value.
When they were on a losing streak, managers typically traded more often, and in larger size, increasing portfolio turnover. Those decisions tended to destroy even more value.

The majority of gamblers and investors tend to be over-protective of their winnings. Others however, become emboldened after a winning streak. In a game of chance where reversion to the mean is certain, pressing your winners is a good way to give it all back and then some. In the stock market, however, where prices tend to exhibit momentum characteristics, the emboldened investor can turn this bravado into his or her advantage.

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***All content, opinions, and commentary by Fallible is intended for general information and educational purposes only, NOT INVESTMENT ADVICE.