THINK YOU'RE READY FOR THE BIG LEAGUES? THINK AGAIN; NEW FINDINGS ON WALL STREET: SMALL INVESTORS DON'T KNOW WHEN TO HOLD, WHEN TO FOLD : UNIMPRESSIVE RESULTS.

Byline: Deborah Adamson Daily News Staff Writer

With the bull market at a roar, many investors might feel a bit smug for making money on their stocks.

But here's some news to wipe that smile off your face: Even if you've come out ahead, many of you actually could have done much better.

That's the finding of ``Why Do Investors Trade Too Much?'' by Terrance Odean, an incoming finance professor at the University of California, Davis.

Odean compiled data on 10,000 randomly selected accounts supplied by a national discount brokerage firm.

His conclusions: Four months after investors bought a stock, the return dips by 1.33 percent. It gets worse - one year later, the stock is down 2.68 percent and although it gains ground, the stock is still down 0.68 percent after two years.

In contrast, the return of stocks they sold rose by 0.12 percent in four months, by 0.54 percent in one year and almost 3 percent in two years.

Odean compared the investors' performances with a weighted index of all major stocks provided by the Center for Research in Security Prices.

``Stocks they (small investors) buy do worse than the stocks they sell,'' he said bluntly.

Odean believes the problem is caused in part by the difficulty of evaluating the universe of stocks available to the public and investors' tendency to act on stock that's been hyped up by financial media and other sources.

Investors also are misinterpreting financial information, he wrote.

Returns are further eroded by frequent trading, Odean said, which points to an investor's overconfidence in his or her abilities.

But before full-service brokerage firms can gloat, there's no evidence that investors do better with professional advice, the report said.

``They're not particularly better,'' agreed John Markese, president of the American Association of Individual Investors in Chicago.

The bottom line is this: Nobody can accurately read the market all the time.

Even with proper research, an investor's call is just a best guess.

Consider Kathy Habring of Thousand Oaks. When she was a novice investor in 1994, she bought 56 shares of Amgen for $39 a share. She sold it when the stock hit $50.

Today, it's trading in the high 60s.

``I didn't have the courage of my convictions to hold it,'' she said.

However, one stock Habring held onto hasn't moved anywhere in three years.

Her investment club, the Southern California Ladies Investment Club in Westlake Village, bought 50 Rubbermaid shares for about $25 a share in 1994.

Six months later, resin prices skyrocketed. Rubbermaid tried to pass the increased costs along to one of its largest vendors, Wal-Mart. Wal-Mart balked and reduced the shelf space at its stores for Rubbermaid, Habring said.

The stock, which had showed promise in 1994, is hovering at the same $25 level.

But Habring's group has yet to get rid of it.

``We're probably being too sentimental, but we can't bear to let go of it,'' she said. ``We thought about selling it, but no one has the heart.''

Bad selling has even hit the famous Beardstown Ladies investment club, whose members published two best-selling books on individual investing.

Betty Sinnock, a senior partner of the group, said the ladies bought AFLAC Inc. in the late '80s for $16 a share. But when the stock didn't move, they sold it to buy something else. Today, AFLAC trades at $50.

``We sold some of our companies too soon,'' she said.

The lesson? ``Companies will work for you if you buy them to hold,'' she said.

In a related study, Odean observed that while investors tend to sell winners prematurely, they also hold onto dogs longer than they should.

``People find it difficult to accept a loss,'' he said.

Just ask Loren Lester, an actor living in Reseda.

Last year, Stratosphere Inc. caught his eye. The Las Vegas hotel with a roller coaster on its roof had received extensive media coverage.

As a voice-over actor for the hotel's commercial, he was convinced by someone in Stratosphere's ad agency that the company's stock would, well, shoot through the stratosphere after it went public.

Without doing any research, Lester bought 200 shares for $9 a share.

Stratosphere went bankrupt and the stock dived. It's now worth less than $1.

``It's sort of pointless to get rid of it now,'' Lester said. ``I'll never make that mistake again.''

But he does take issue with Odean's criticism that investors sell too quickly. He cautions against being too greedy and losing the gains.

``I don't think it's stupid to sell when there's a run-up (in price),'' Lester said. ``You can turn around and invest in some other companies.''

The study merely reflects the reality of being an investor, said Judy Powell, an Agoura Hills resident and member of the Moneywi$e investment club.

``Anybody who's been in the market has said at one point, `We should have sold sooner or we should have held on longer,' '' she said. ``But that's a tough call. That's easy to say in hindsight.

``Everybody makes mistakes. Hopefully, you learn,'' added Powell, whose club once invested in - and lost money on - Figgie International because the name was cute. ``If everybody had a crystal ball, we'd be rich.''

Since it's hard to predict the market, one answer is to diversify by holding stock in at least 20 companies, Markese said.

That way, one stock's upswing will offset another's downturn.

It's also important to hold stocks for the long term, at least for five years, to ride out the market's ups and downs, said Tom O'Hara, chairman of the National Association of Investors Corp., an association of investment clubs headquartered in Madison Heights, Mich.

He added that investors should invest regularly and reinvest dividends so the purchases will even out the price highs and lows.

These are all strategies that Jean Wagstaff followed, and she's doing well.

In six years, she has parlayed a $5,000 investment in Walt Disney Co. stock and modest earnings from three side businesses - accounting, dog breeding and photography - into a comfortable paper profit that's enough to pay off the mortgage on her $250,000 home.

She and her 73-year-old husband, Roy, live in a 3,600-square-foot home they purchased less than two years ago. The eggshell-color house, still smelling of its newness, is being landscaped. They have a three-car garage.

``I'm aiming for a million dollars,'' said the 67-year-old Quartz Hill resident without a hint of shyness. ``And my next car will be green. Green for money.''

What happens to a stock after an investor buys or sells it?

Stocks bought did worse than stocks investors sold, according to a recent report on investing habits. This chart compares both categories to a weighted index of all major stocks from the Center for Research in Security Prices.

THE RETURN AFTER

FOUR MONTHS ONE YEAR TWO YEARS

Stocks sold + 0.12% + 0.54% + 2.89%

Stocks bought - 1.33% - 2.68% - 0.68%

Difference - 1.45% - 3.22% - 3.57%

SOURCE: ``Why Do Investors Trade Too Much?'' by Terrance Odean, incoming finance professor at UC Davis.

CAPTION(S):

2 Photos, Chart

Photo: (1--color) Many small inverstors are far removed from Wall Street, where Joseph Oorso, a specialist with Speer, Leeds and Kellog, conducted trading last week.

Associated Press

(2) An exception to the rule, small investor Jean Wagstaff has parlayed a $5,000 investment into a comfortable paper profit that's enough to pay off the mortgage on her $250,000 home.

Jeff Goldwater/Daily News

Chart: UNIMPRESSIVE RESULTS (see text)