Where All The Children Are Above Average

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No, not Lake Wobegon, we’re talking about Finland.  A recent study found that Finnish children under the age of 10 were remarkably astute investors, outperforming regular investors by as much as 9 basis points per day, excess returns equivalent to 20% on an annualized basis.  The study indicated that toddlers were particularly adept at anticipating major earnings announcements and takeover announcements.

In an article due to be published in the Journal of Finance, Henk Berkman of the University of Auckland, Paul Koch of the University of Kansas and Joakim Westerholm of the University of Sydney, were able to correlate trading records with personal information through the cooperation of Euroclear Finland.   The study, titled “Informed Trading through the Accounts of Children” examined data from 1995 to 2010.

The authors found that under-aged account holders exhibit superior stock-picking skills on both the buy side and the sell side over the days immediately following trades. They significantly outperform older investors by an average of 9 basis points (bp) based on all trades made one day earlier, by 7 bp based on trades two days earlier, by another 5 bp for trades three days earlier, and by an average of 2 bp per day for previous trades made over days -4 through -10.  Finnish children rival U.S. Congressmen in their stock picking abilities.

The authors concluded that the successful trading “likely stems from superior private information that is about to become public” in other words, insider trading.  On the day before major earnings announcements, young account holders trade in the correct direction 57% of the time.  Their batting average was even better for the day before takeover announcements:  their proportion of correct trades was 72%.

As quoted in an posting on GuruFocus, the study authors doubt that the phenomenon is limited to Finland and believe that if the study were replicated in other major markets, the results would be similar.  They encourage the SEC to monitor successful accounts belonging to children.

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