He who knows much about others may be learned, but he who understands himself is more intelligent. He who controls others may be more powerful, but he who has mastered himself is mightier still. - Loa-Tse (Chinese Philiosopher)

An interesting paper called "Why Do Investors Trade Too Much?" was written by Terrence Odean in 1997. Over a seven-year period (1987-1993), Odean tracked 97,483 trades among 10,000 randomly selected anonymous traders at a major discount brokerage. The turnover of these accounts was 78%, meaning that most of ethe portfolio was sold and replaced in each year of trading. He compared the portfolios to the market averages over four-month, one-year and two-year periods, and in all of those periods he found that:

• The stocks that the traders bought consistently trailed the market average and
• The stocks that they sold consistently beat the market.

   

This terrible result is a reminder that traders, as a group, find it very difficult to sell shares that make a loss, while cutting profits early selling their winners. The study of this phenomenon, now called behavioral finance, used to get nothing but smug smiles from efficient market hypothesis-toting academics, but is now a full blown field of research lying on the border between psychology and economics.

The problems that investors face, in dealing with their money, always seem to boil down to the same old factors, and that it what I will introduce in the rest of this section.