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3 Advantages You have Over Investment Professionals

Stocks

Written by:

Moss Piglet

Do retail investors have no business investing?

The average individual investor (and often, even the professionals themselves) have the impression that they (and only them!) are unable to perform at a high level similar to how the investment management professionals do.

After all, professionals possess complex tools and hordes of analysts to develop an investment thesis. I think that this could not be farther than the truth.

These are 3 ways where individual investors possess several advantages of investing in the stock market than the professionals.

#1 Patience and Time Horizon

In my opinion, the biggest advantage that the individual investor has over the professionals is time.

In the professional investment world, you are only as good as your last quarter. Fall short in 2 quarters and you might lose your job. Can you imagine the fear these guys must hv recommending deep value stocks? Can you understand why these guys would rather bang the gavel on Apple/Amazon/Netflix/Google/Facebook?

Peter Lynch used to say that nobody gave a rat’s ass if you lost money on the big named stocks. But if you lost money on unknowns, your job could be on the chopping block.

What a way to go about investing, eh?

As a result, most investment thesis posted by analysts have shorter-term targets and are quicker to cut losses. They do not have time to watch a business grow and compound in value.

These guys do it because their jobs demand they make money fast and hard. Try explaining to a billionaire that his portfolio dropped 50% year to date and see which Hedge Fund would hire you from the one that just fired you.

You are not bound by the same rules.

For individual investors, the only “client” that you need to answer to is yourself.

By being patient and looking for opportunities such as turnarounds or out of favour (due to temporary circumstances), individual investors can afford to wait for the deep value to be realised and there is no imperative to seek out highly performing stocks to chase short term performance.

In NBA terms, individual investors would be like Philadelphia 76ers and their long term strategy called “Trust the Process” which paid off at the end. The team had gone through many down years before they finally become championship contenders. 

Being able to sacrifice short term results for long term gains is really an unappreciated advantage that investment professionals do not have.  

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#2 Flexibility

Editor’s Note: This post is an informative one on how individual traders can sometimes take advantage of indexes trying to sell off to market highs and lows dicated by fund management rules. It’s also highly informative on how some funds operate: if you operate by known rules and if you have no choice but to follow a fixed pattern, you’re liable to be exploited.

There are times when investment professionals have little choice but to buy high and sell low. This is because they are tied down by clients who invest in managed funds during a bull market but raise redemption requests in a bear market.

Also, when a stock is entering or leaving an index, mutual funds that manage their portfolios against that index will be forced to buy or sell even if there is no change in the underlying business. Investors could exploit these and pick up stocks at steep discounts after these events.

This forced buying and selling is exactly the opposite of what value investing is about, investing in down markets and selling at market peaks when stocks are overvalued.

As an individual investor, you have the luxury to buy and sell stocks at will, devoid of requirements around things like portfolio weightage.

#3 First-Hand Knowledge

Although investment professionals have a huge information database to develop their investment thesis, there are times when first-hand knowledge known to people working on the ground have not been factored into the stock price yet.

As an individual investor in your relevant fields, this is one of the most crucial advantages you enjoy that professionals do not.

Take me for example, I work in the construction industry and there are times when I am unable to order pre-mix concrete due to high demand. This could mean that the concrete supplier is facing an increase in sales and their financial performance for that particular quarter could surprise on the upside.

Similarly, a baker who observes that all their bread were sold out almost every day could infer that his company is doing very well.

These observations could potentially lead to opportunities before the investment professionals got wind of this information.      

Closing

Investing is not a game whereby everyone has to play by the same system. By understanding how the professionals work and operate, the individual investor can gain an advantage over the market.  

A better appreciation of the 3 advantages should inspire more individuals to take control of their finances and create their own wealth.

With a little bit of effort and an open mind, there is no reason that you cannot perform as well or even better than the pros.

Cheers.

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