Individual Investors Have Five Key Advantages Over Institutional Investors

by Jae Jun, Old School Value

“Don’t bother. The professionals are better than you and they know something you don’t.”

Really?

There’s some truth to that, but there’s plenty of lies mixed in that short statement too.

And it’s easy to dismiss yourself or come up with excuses for why you can’t do it.

Here are five to get things started.

5 Common Excuses that Investors Believe

1. The market definitely knows more than me
2. I’m not smart enough to invest on my own and build wealth
3. I always miss out on the best opportunities
4. I can’t beat the computer trading that the market uses
5. I don’t know where or how to start

Sure there’ some validity to each excuse above. But investing is unique because anyone can be a good investor.

The Uniqueness of the Stock Market

Outside of the stock market, it’s a good idea to find a professional to solve a problem instead of trying to do it yourself or asking the average Joe next door.

Need a kidney transplant, find a surgeon. Not Ms Traci, your old biology teacher.

But the investment industry is one of the very few where you don’t need any qualification, practice, skill or even knowledge to be involved in the markets.

The entry criteria is zero which is why so many people lose money, throw their hands in the air and forever condemn the stock market as a rigged gambling machine.

But choose your direction wisely from the get go (value investing for you and me), build a good framework based on good guidance, quality investment books and investing resources, and it’s easy to do well.

Ignore all the talking heads using jargon or the people who talk about much money they are raking in.

All they want to do is make you feel dumb and gloat about how smart they are.

But what if you continue to disbelieve, or you know people who continue to doubt that investing successfully on your own is possible?

You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ. – Warren Buffett

If you have more than 120 or 130 I.Q. points, you can afford to give the rest away. You don’t need extraordinary intelligence to succeed as an investor. – Warren Buffett

Here are 5 advantages small investors hold over professionals that you must take advantage of.

1. As a Small Investor You Are Able to Choose Your Expertise

When you are investing as an individual, you are free to choose whatever specialty you like.

You can choose whatever stock to invest in.

Large.

Small.

Biotech.

Miners.

Safety.

Whatever.

You can even choose to focus and become an expert in a few industries that excite you or take a broader approach.

On the other hand, professionals are paid to focus on certain fields or investing strategies. If you get sick of an industry, just move onto your next interest.

Professionals don’t have this luxury of choosing their strengths.

As a small investor, you are agile and can go to different market caps, sectors, and even buy some odd lots for a quick turnover.

2. You Can Go Against the Grain

Professional investors follow the herd.

It’s better to be incorrect with the herd and maintain job security instead of sticking your neck out and getting fired if the investment doesn’t work out.

You don’t have a boss obsessed with profits breathing down your neck with another younger guy waiting in line to take your job.

You’re free to take a contrarian approach like the good ol’ net net strategy or concentrating on Buffett type stocks.

The pros will start investing in an “uncertain” stock, sector or country once it starts to rebound – when the best time to invest has already passed.

3. You Are Not Judged Monthly, Quarterly or Yearly

Not being obsessed with beating the market is one of the biggest advantages you have.

Because the pros have clients and upper management demanding results, the only thing they can do is chase hot stocks, hot trends and buy and sell quickly so as not to “look” left out.

Ignoring short term results and focusing on the big picture will put you in a position to succeed.

The once bad Golden State Warriors didn’t win the NBA championship by flipping players every time something didn’t work out. They had a long term team building strategy that paid off in the end.

Being able to sacrifice short term results to compound long term wealth is a huge advantage.

4. You Can Afford to Be Patient

Can’t find a company to invest in?

That’s ok because you can hold cash and wait for the right opportunity. Nobody is going to say anything because you hold 30% of your portfolio in cash.

You also put yourself in the best position to succeed by buying depressed securities and playing the waiting game.

Professionals on the other hand are risk-averse as they can’t afford to lose their client’s money. This leads to following the herd and mediocre returns.

5. It’s Cheaper

You don’t need a room full of computers, computerized trading system software or instant access to information.

You don’t have to pay people for insider “tips”.

With all the high frequency trading going on, the long term value investing approach saves you money on commissions, taxes and other fees.

Take Advantage of Your Advantages

There’s no reason to play the same game as the professionals.

In Malcolm Gladwell’s book David and Goliath, it covers how the “disadvantaged” overcome the expected winners.

An important observation was that if David (the small investor) tries to take on Goliath (Wall Street professionals) within the same set of rules, the winner is always Goliath.

However, by not playing by the same system and expectations, David is able to defeat Goliath.

In other words, as a small investor, do what the big boys can’t to beat them at their own game.

In 2008, Buffett bet that a low cost index fund will outperform a fund of hedge funds.

Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.

The result at the start of 2015?

The S&P500 up 63.5% and the fund of hedge fund up around 19.6%.

The takeaway?

It’s only in the stock market where the average Joe can have such a strong advantage over the professionals.

Make the most out of your advantages.

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