Discount brokerage may not be the answer to investment returns, according to recent study of a large discount stock brokerage firm's clients. The fault lies not in the brokerage services themselves, but in the personalities of the investors, according to the results. And the lessons for homebuyers and sellers couldn't be more apparent -- buy and hold still works in stock market investment and as a homebuying strategy.

Why is this pertinent? Many people, who would like to see real estate commissions come down further, point to the stock brokerage industry as a great example of why lower commissions will benefit consumers because they save money making the trades. But guess what? They don't make more money on the returns.

According to a recent study of discount brokerage customers, do-it-yourself stock and bond investors who take advantage of online low trading commissions didn't do as well as the investors who bought and held.

Behavioral finance professors Brad Barber and Terry Odean produced a startling report in January 2005 called "All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors," that suggests that investors lost more money when they went online, primarily due to their own behavior. These investors tend to speculate rather than invest, trade more frequently and sell stocks that are better than the ones they buy.

Barber is at the Graduate School of Management, University of California, and Odean is at the Haas School of Business, University of California, Berkeley. In their abstract, Barber and Odean "test and confirm the hypothesis that individual investors are net buyers of attention-grabbing stocks, e.g., stocks in the news, stocks experiencing high abnormal trading volume, and stocks with extreme one-day returns. Attention-based buying results from the difficulty that investors have searching the thousands of stocks they can potentially buy."

The pair researched the portfolios of 66,400 investors to find that active online traders (those taking advantage of the discount fees to do their own investing) were beating the market by 2 percent, but after they went online the discount route, they fell under the market by 3 percent. Active traders averaged 11.4 percent versus 18.5 percent for the buy/hold investors. The online discount brokers traded more, incurred more transaction costs, sold winners and bought losers.

According to Paul B. Farrell, columnist for CBSMarketwatch, "One thing I've learned from long experience, including a few years publishing a market-timing newsletter, is that very few of America's 95 million investors are psychologically strong enough to be successful traders; 99 percent will lose like they did in the 2000-2002 bear market."

He then outlined why:

• Investors tend to buy high, sell low, with a penchant for buying and selling at the wrong time. "Greed gets them in at the top of a bull cycle. Fear pushes them out at the bottom. They lose both ways."
• "Markets are random, irrational, unpredictable. Wharton School economist Jeremy Siegel studied 120 of the biggest up and down days between 1801 and 2001. Only 30 could be explained. The market is random 75 percent of the time. You cannot predict the unpredictable."
• An optimism bias causes investors to have too much confidence. "We overestimate our skills and our grasp of the market. We underestimate risks. Then we forget about our losses, even tell researchers we're beating the market when our returns are less than inflation. That's denial."
• The more you trade the less you earn because active trading increases transaction costs and more trading resulted in losing trades.
• Trading online makes losing easier causing traders to fall 3 percent under the market. "Trading is not the get-rich-quick scheme that financial newsletters and trading-system gurus want you to believe. One study by the North American Securities Administration Association found that 77 percent of day-traders lose money. The "winners" total take averaged $22,000."

Farrell's conclusion? "By trading frequently, individuals hurt not only their performance net of fees, but they also hurt their performance before fees."

There's a lesson here for the homebuyers who use discount brokerage to net bigger gains in housing. Buy and hold strategists are being replaced by speculators. Low interest rates, low and no-down-payment loans are helping to fuel more speculative buying. Buyers aren't staying in their homes as long as their parents, using dropping interest rates to "move-up" or buy second-homes. Over one-third of homebuyers are buying homes they don't intend to occupy, according to a 2004 study by the National Association of Realtors. Nearly 23 percent of homebuyers last year were investors and another 13 percent were second-home buyers.

So what do do-it-yourself stock investors have to do with homebuyers?

While the relationship has yet to be proven, they could have the same mentality. If they are smart enough to demand and get lower commissions, then they must be smart enough to make their own investments.

Published: June 9, 2005

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Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. For more articles by Blanche, click here.