4 Most Important Advantages of Small Investors
The majority of the people have the opinion that being a small investor has a lot of disadvantages but hardly any advantages.
But they overlook the fact that small investors are the major financial resource to the mutual funds and big investment houses. Therefore, so called “smart” money is dependent on “small” guys.
In a case of overvalued bull market, mutual fund managers have the pressure to overweight the stocks rather than bonds because of their greedy customers. And in an undervalued bear market, they would miss a lot of opportunities or at least, they could not enough exploit the undervaluation because of scared investors of theirs.
Therefrom emerge some opportunities to develop competitive advantages for the individual “small” investors:
Volatility is usually considered as a proxy for risk which is completely misleading. High volatility doesn’t mean the company is a very risky investment and low volatility doesn’t make the investment a safe bet.
It is not unusual that some companies with deteriorating business support their stock price and lower their downside volatility with share buybacks or/and by increasing dividend payments. In the stock market, it is also common that successful companies get harshly punished by wall street when they face a temporary “trouble”.
Big investment houses are heavily dependent on their quartal performance which makes them very vulnerable towards volatility.
If a successful company faces a temporary “trouble” and punished therefore very harshly by wall street then, the small investor can step in and take advantage of it.
Long Term Perspective:
In financial markets, patience pays off, and in fact tremendously! In a case of company recovery or business transition which can take a couple of years, big boys cannot wait. They need companies providing immediate results. Even if the company’s business is in good shape but its growth strategy needs more than one year the wall street sees only the quartal results, nothing more.
If you as a small investor have the patience of at least 5 years then even this advantage only is enough to not worry about being “small”.
The dynamic in the economy and in markets continuously accelerating its speed. And the big investment houses cannot respond to bad or good news as quick as small investors because of their bureaucracy and also because they trade with high volumes which can require a timeframe of weeks.
If you are a mutual fund manager you would probably not build an “aggressive” portfolio. As mentioned above, you would try to avoid volatility and focus only on short term results. But without an aggressive portfolio, it is very hard to beat the index. For example, Warren Buffett’s portfolio could have 45 positions but 5 of them can make more than 60% of the total portfolio.
Small investors can also invest in small companies. Big investment houses, on the contrary, have a minimum market capitalisation limit and because of that, they have fewer investment alternatives, compared to small investors. If they invest in a small company, either the position will be too small for them or the stock price will rise to the very high levels. In both cases, they would better off if they invest in companies with high market capitalization.
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