Updated: Feb 8, 2021
Retail investors often get a bad rep. They are thought of as lemmings moving in and out of the market. In fact you have a number of advantages over the pros.
I was reading an article recently that suggested that retail investors by and large have missed much of the rise in equity markets. Apparently retail investors reduce equity allocations when things are tough and increase them again as markets peak. Talk about buying high and selling low!.
I don't know how true that anecdotally is but retail investors are possessed with more natural advantages investing in stock market than what they may believe.
In my view the biggest advantage that you have as an investor is time to watch a business grow and compound in value, time to watch a businesses turn shrewd reinvestment of capital into growth opportunities that return multiples of your investment.
This is a really underappreciated advantage that institutional investors just don't have.
Most institutional investors are forced to chase performance, apart from a select few such as Berkshire Hathaway. Lagging one year or three-year performance is seen as a sign to the market that these funds should be dumped.
Institutional investors and fund managers with lagging performance often see dramatic fund outflows. Hence it's crucial for them to be in the hottest stocks at any point in time.
That often means that they don't have the patience to wait for a deep discount in value to be realized. They're unable to wait patiently to see an investment thesis come to fruition in time frames longer than 6 to 12 months. The biggest issue of all for an institutional investor is they often have to take profits in highly performing stocks to offset losers that they otherwise have and show net performance gains over anytime.
Retail investors aren't forced to chase short-term performance. There is no imperative on retail investors to sell out big winners to show paper gains. The fact that retail investors do this speaks to a desire to take profits and the lack of patience in a longer-term thesis playing out.
By and large managed funds also have arbitrary position and sector limits that limit position sizes. This also creates the need to trim positions if they become too large relative to the rest of the portfolio.
One of the biggest advantages that retail investors have is the ability to add small-cap and mid-cap stocks at will, irrespective, devoid of requirements around portfolio weighting. As a practical matter most funds can't buy enough of the small or midsize stock freight to dramatically alter their fund performance.
They have too many assets to be invested and a small to mid-cap stock often doesn't move the needle in terms of their overall performance given it's hard for them to buy the volume of stock that would make a difference. The exception here is of course of those specially dedicated small and mid-cap funds.
With a little bit of patience and a little bit of discipline, individual investors can do far better than many funds with respect to managing their own money. The ability to ride out strong winners and hold them for long periods of time without market pressures to take profits are all advantages that most funds don't have. The ability to form a thesis and be prepared to wait a couple of years while it plays out is also a luxury that most investors don't have.
A better appreciation of the advantages that individual investors have over other institutions in managing their money should inspire more investors to take control of their own destiny.