Three advantages individual investors have over professional investors
06/19/2019 | 12:44am EDT
Individual investors often think that they are powerless when they’re facing professional investors. They believe (and not always wrongly so) that the latter are more competent and better informed. This fear, however, is often unjustified.
Provided that the individual investor masters the essential technical basics, has a couple of years of experience, and has an adequate temperament, i.e. a reasonable and placid one, they can fully benefit form three tactical advantages they have at their disposal.
The first advantage is the size, which naturally is tiny when you work with a few tens or hundreds of thousands of euros in the face of the institutional competition. The average ticket of an institutional investor is closer to the tens of millions of euros - or even hundreds of millions of dollars in North America.
Individual investors, therefore, are more flexible, more agile to use a trendy entrepreneurial term. As such, they can consider an investment universe extended to companies of all sizes, including very small ones, while a reduced liquidity eliminates the institutional competition here right from the start.
In Europe, for example (particularly in France), there are several listed companies whose market capitalization does not exceed three or four hundred million euros, and whose capital is mainly controlled by the managing family. This leaves only a small float available whose financial performance is no match for the heavyweights in their respective industries.
While a reduced float thus forms an eliminating factor for large players, it provides a potential opportunity and therefore a privileged hunting ground for individual investors.
The second advantage is the individual investors ability to think long term, and thus to adhere to a genuine long-term investment approach. Common sense dictates that shares in a listed company should be acquired in the same way real estate is acquired, i.e. by projecting credible profitability assumptions over several decades.
Professional investors, however, will, even with the best intentions in the world, hardly be able to tolerate more than one or two quarters of underperformance without seeing their clients leave them or their employers thank them for their services.
In a world that is feverishly boosted by instant performance, where clients are almighty and managers evaluated on a weekly if not daily basis, the possibility to think in terms of years rather than weeks gives individual investors a precious serenity when it comes to managing their affairs.
The third advantage is the ability of the individual investor to maintain large cash reserves - at least when put in perspective with the total assets - ready to be used when a quality opportunity comes along. Of course, this doesnt happen often, especially when said individual investors only have limited time to devote to their research.
Professional investors, on the other hand, dont have this luxury because their clients dont pay them to just sit on the capital they confide them with. To quote Warren Buffett: "The stock market is a no-called-strike game. You dont have to swing at everything - you can wait for your pitch. The problem when you are a money manager is that your fans keep yelling, Swing, you bum!
Individual investors have the advantage of being more detached, freer and more opportunistic and they would be wrong not to use these competitive advantages.