According to a recent Reuters report, a study of half a million accounts in Finland from 1995 to 2010 discovered that “accounts set up to benefit kids 10 years and under did really well at stock picking, and did especially well just before mergers, earnings releases and events that generate big stock moves.”
Before you start investigating whether you can adopt a financially savvy Finnish child, Reuters notes that it’s most likely the children’s guardians who are using their accounts as a safer way to engage in insider trading.
How well did the mini-Finns do?
“The gap between the junior set and typical accounts held by adults was striking: in the day following trades made by kids, their accounts outperformed the adult accounts by 9 basis points,” Reuters reports.
“Ahead of major earnings announcements, the kids chose correctly whether to buy or sell 57 percent of the time and beat their elders by 1.1 percent in the following day.
“It gets even better — at least for junior. On trades made the day ahead of a merger announcement, juvenile portfolios outperformed by 12 percent the following day, and made the right decision to buy or sell an uncanny 72 percent of the time.
“The rest of the market, by the way, chose correctly whether to buy or sell only 50 percent of the time.”
The authors of the research — Henk Berkman, at University of Auckland, Paul Koch at the University of Kansas and Joakim Westerholm at the University of Sydney — conclude in a paper in the Journal of Finance that: “When guardians trade through underaged accounts, there is a relatively high probability that they are trading on private information.”
Says Reuters columnist James Saft: “A society with more insider trading will, all else being equal, allocate capital less well, and grow more slowly.
“If this is happening in Finland, which is ranked as being the least corrupt nation on earth, it is definitely happening elsewhere.”
Huh? Not on our playground?!
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