Study Shows Investors Make Bad Sector Bets

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Russell E. Jame, University of Kentucky, and Qing Tong, Singapore Management University – School of Business, studied “industry-wide investment decisions” of retail investors. According to Jame and Tong:

We find that retail investor industry demand is highly correlated and strongly related to past industry returns. Moreover, industries heavily bought by retail investors over the past year significantly underperform industries heavily sold over the subsequent year. Similarly, stocks in industries heavily bought by retail investors underperform stocks in industries heavily sold, even after controlling for firm-level demand. Our results suggests that industry-wide categorization influences the investment decisions of retail investors and has a significant impact on asset prices.

Jame’s and Tong’s 35 page PDF file is available for download at SSRN.

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