Collectively, individual Taiwanese investors racked up $32 billion in stock market losses between 1995 and 1999 -- virtually all due to frequent trading, according to a new study by researchers at UC Davis, National Chengchi University in Taipei and Peking University.

The study, which will appear in the February issue of the Review of Financial Studies, adds to the evidence that most individuals lose when they try to beat the stock market.

"Our study presents a clear portrait of who benefits from trade," said Brad Barber, lead author of the study and a professor in the UC Davis Graduate School of Management. "Individuals lose. Institutions win."

The study showed that while the aggregate portfolio of individual Taiwanese took an annual 3.8-percentage-point hit during the study period, financial institutions enjoyed an annual performance boost of 1.5 percentage points. Half of the institutional profits went to foreign institutions.

Barber said the lesson for individual investors is simple: "In Taiwan, the United States, and elsewhere, investors who are saving to meet long-term goals should buy and hold diversified portfolios, such as low-cost mutual funds -- and refrain from frequent trading."

The study focused on the Taiwan stock market -- the world's 12th largest financial market -- because it offers access to a unique dataset that contains complete transaction data, underlying order data, and the identity of each trader.

"The comprehensiveness of the dataset allowed us to make two important contributions relative to prior research," Barber said. "First, we documented that the losses incurred by individual investors are staggeringly large. Second, we showed that losses for individual investors represent gains for institutional investors, and constitute an unambiguous wealth transfer from Taiwanese individual investors to foreigners."

The researchers calculated that the $32 billion loss to individual investors (in U.S. dollars) is equivalent to 2.2 percent of Taiwan's gross domestic product or 2.8 percent of the country's total personal income. Gross trading losses, commissions, transaction taxes and market-timing losses all contribute to individual trading losses.

Barber and his colleagues consider several possible explanations for the high levels of trading by individual investors in Taiwan, but conclude the most likely explanations are either entertainment (investors simply enjoy trading despite large losses) or overconfidence (investors overestimate their trading ability).

Stock turnover in Taiwan during the study period was two to three times that observed in the U.S., suggesting that overconfidence and entertainment may play a larger role among Taiwanese than Americans.