Buying Is Easy. Selling Is Hard

Investors are so bad at picking stocks to drop that they’re better off doing it at random.

Michael P. Regan

Princeton economist Burt Malkiel is famous in investing circles for suggesting that blindfolded monkeys throwing darts at a newspaper’s stock pages could build a portfolio that would do just as well as one chosen by expert money managers. A recent academic study suggests that the blindfolded monkeys actually may do even better than the average institutional investor. However, the monkey traders should be given the darts when it’s time to sell holdings, not when deciding what to buy.

The researchers looked at more than 4 million trades among 783 portfolios from 2000 to 2016 and found that stockpickers actually showed skill when buying. However, the sales by these institutional investors cost them as much as 100 basis points, or a full percentage point, of yearly returns compared with a no-skill strategy of simply selling holdings at random, according to the study Selling Fast and Buying Slow by researchers from the University of Chicago, Carnegie Mellon University, MIT, and portfolio analytics firm Inalytics Ltd. The study concluded that one of the likely reasons for the discrepancy was “asymmetric allocation of cognitive resources.” Translation: Investors spend way more time analyzing what to buy than what to sell.