One noticeable aspect of the stock market the past few years is the absence of the retail investor. Although we get an occasional surge of retail inflows like we saw in January for the most part individuals have avoided the stock market. They may have some exposure through retirement plans but after seeing two devastating losses in less than a decade many people have just gotten scared and stayed away. Many fell, with some justification, that the market is rigged against them by high speed and high frequency traders that exploit their order flow. The brokerage firms have not really been a friend of the individual over the years either. A lot of potential investors feel like the stock market is simply a game they cannot win and therefore do not play.
It is important to recognize that much of the pain inflicted on retail investors is done by retail investors. Numerous studies indicate that the average investor does not perform as well as the averages. There is a tendency to over trade and allow fees and commissions to eat into their margins. Rather than exploiting the fear and greed cycle they usually are the cycle selling in a panic at the bottom and worst of all buying into the excited frenzy as prices have nearing the end of a bull run. We tend to buy stories and sales pitches and ignore fundamentals and often fail to do the homework needed to be a successful investor.
The truth is that the biggest mistake investors make is not exploiting the significant advantages we have over the large institutional investors. Wed can do things they cannot and can adopt a mindset that has proven profitable but the large hedge and mutual funds simply cannot adopt.
First, and perhaps most importantly, we do not have to play the short term return game. Measuring the performance of a business or an investment fund by quarterly results is ludicrous but that is exactly what happens in the investment arena. Fund managers have to keep up with the indexes and their competitors and this leads to adopting a herd like mentality and doing what everyone else does to keep up. You and I do not have to do that and can adopt a longer term more business like view of our investments.
We have no institutional mandates or style box concerns to consider. We can own as high or small a percentage of stocks compared to bonds as we choose. We can hold as much cash as we want to as well. Odds are we will not fire ourselves for buying a stock that doesn’t pay a dividend as mandated by the prospectus or account agreement. If one of our stocks does not fit into the large cap socially conscious growth classification we do not have to resign from our account. It is our money and we can mix it up with value stocks, special situations and even growth stocks as we see fit.
We have an enormous size advantage as well. One of my favorite stocks right now is an aerospace company with a market cap of about $70 million. A fund with a $1 billion under management cannot buy a 1% position of the stock without moving the price and triggering a 13G filing with the SEC. You and I do not have that problem and can venture into areas the big guys simply cannot.
We have a huge time advantage as well. If we consider one of our stocks to be a solid business with a margin of safety we can hold it for as long as need to for the price to reflect the value. We can view put portfolio as a collection of businesses and allow time to unlock the value. The institution cannot do that as they have to keep up with the Dow Joneses and do not have the luxury of time. My best results have come from stock held for many years but most of the big funds have a turnover rate of close to 100%.
One of our biggest advantages comes from not having to play just because the casino is open. Getting caught up in the action is usually disastrous for individuals with careers or a business to run, a family and other time-consuming obligations. Trading is hard work and the simple truth is not that many people are really good at it. When you get the urge to swing trade that 100 shares of a high flyer keep in mind that the guy on the other side probably has twin Phds in math and econ and needs special air conditioning units to cool his computers he uses to trade. He is a shark and he views you as lunch. Don’t be lunch.
The most powerful stock market story ever was told by John train many years ago in Forbes magazine. He introduced to us to the pig farmer Mr. Womack who always made money in the stock market. When Mr. Womack saw on the news that Wall Street was in disarray and in full disaster made he would drive into town and buy some stocks that had fallen precipitously, had sound balance sheets and paid dividends. He then forgot about the stock market for the most part until after a period of few years he noticed that the papers were full of talks of new market highs and wildly optimistic prediction. He would then drive back into town and sell his stocks. On balance the man never lost money in the stock markets and enjoyed significant gains and a steady flow of dividends.
You have significant advantages over the big funds and large traders. Use them to make you investing more business-like and more profitable.