The grass is always greener on the other side of the fence; the other guy somehow is always one up. Our minds too frequently focus on the negative. If the choice is between self-deprecation and uplift, self-deprecation usually wins.
I’ve seen this many times in investing. So many individual investors think the other guy always has it better, particularly when comparing themselves to the big guys – the large fund managers relentlessly featured in Barron’s, The Wall Street Journal, and CNBC. The big guy appears to always have the answers, to possess unique knowledge, to be pointed in the right direction.
Appearances can deceive. They may have a ready answer and unique knowledge, but that doesn’t mean either is right (at least right for you). What’s more, they can be as lost as anyone when traveling their chosen path.
Consider glamorous hedge funds: Bloomberg reports that the average hedge fund posted a 1.2% gain this year through July. The S&P 500 Index returned 7.7% in comparison. Because of lackluster returns, investors pulled $20.7 billion from hedge funds, one of the largest withdrawals in years.
Size is the problem for many of these funds, Barclays PLC found in a survey of the industry. Many hedge funds are simply too big to perform.
Tudor Investment Corp., which manages $11 billion and employs about 400 people, appears to have adopted the too-big-to-succeed hedge-fund model. Like other firms, Tudor has struggled to outperform since the 2008 financial crisis. Its main fund lost 2.5% this year through Aug. 5, according to Bloomberg data. Investors have responded by pulling nearly $2 billion from Tudor funds; Tudor has responded by laying off 15% of its workforce, hiring a few PhD-credentialed quant. traders, and upping the use of leverage. (In other words, upping the risk profile of its portfolios.)
Advantages of Being a Small Investor
The fact is that you can compete with the big guys on your own terms and in your own way. What’s more, you can do so and accumulate fortunes larger than you’ve likely imagined. (I’ve written about such unimaginable fortunes achieved by ordinary investors here.)
Size – small size – actually imparts advantages that you’ve likely overlooked. Your size (and the individual investor is about as small as it gets) bestows advantages unavailable to the big guys.
Anonymity is one advantage. Your buy-sell decisions have little market impact. The big investors, in contrast, must invest millions of dollars in one stock. They must carefully parse the trade to avoid large price movements. You, on the other hand, can buy or sell a few hundred shares of most anything listed on the major exchanges, and nary a ripple is created. You can come and go as you please.
The smaller the size, the larger the investment universe. Your options expand considerably when investing thousands of dollars compared to millions, or billions, of dollars. For example, you can buy High Yield Wealth recommendation Blue Capital Reinsurance Holdings (NYSE: BCRH), a quality high-yield reinsurance company with a $155-million market cap. Warren Buffett has an affinity for insurance companies. He may or may not like Blue Capital, but even if he did, there is nothing he could do about it.
You Control Expenses, Manage Taxes
As a small, self-directed investor, you control expenses. Most online brokers charge less than $10 per trade. Once you own a stock you incur no additional expense. An actively managed mutual fund will skim 1% to 2% of your wealth annually. A hedge fund will appropriate 2% of money under management. Once a performance goal is exceeded – say a 6% return – management can take 25% thereafter.
As a small investor, you can efficiently manage taxes. A portfolio of high-quality dividend growth stocks can be held for years, if not decades. No capital-gains taxes are realized. If the money is invested in a traditional retirement account, capital-gains and dividend taxes can be deferred until withdrawals are mandatory. And if wealth is held in a Roth IRA, taxes are never realized. Wealth compounds faster when the taxman is held at bay.
Most important, in my opinion, time is on your side. As a small individual investor, you have no institutional imperative to beat a benchmark every 90 days, or even every year (a la a Tudor Investment Corp.). You have the luxury of holding whatever you want for as long as you want. You can hold stocks that temporarily lag the market (as all eventually do) that have the potential for superior gains down the road when the market turns (as I describe here.)
Our mission at High Yield Wealth, Personal Wealth Advisor, Dividend Confidential, and other Wyatt Investment Research services, is to help the small investor – you – exploit his advantages and to realize his or her potential. You just have to take the initiative.