Graham, Buffett, Mutual Funds – The Costs of Trading

Download 2010-2-13 The Intelligent Investor: Too Much Trading –

Pause before you plunge. Trading costs money, raises your tax bill and can reinforce bad habits. As Benjamin Graham defined it, investing requires "thorough analysis" and "promises safety of principal and an adequate return." Trading on rumors, hunches or fears is antithetical to investing.

Mr. Graham insisted that "the typical individual investor has a great advantage over the large institutions"—largely because individuals, unlike institutions, needn't measure performance over absurdly short horizons. The faster you trade, the more you fritter away that advantage.

A new study by Mercer, the consulting firm, and IRRC Institute, an investing think tank, asked the managers of more than 800 institutional funds how often they traded.

Two-thirds had higher turnover than they predicted; on average, they underestimated their turnover rate by 26 percentage points. Even though most are judged by performance over three-year horizons, their average holding period was about 17 months, and 19% of the managers held the typical stock for one year or less.

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