By: Tim Bennett
09.05.2019
09.05.2019
When it comes to successful investing, the biggest players don’t hold all the cards, as Tim Bennett explains in his latest video.
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How small investors can beat much bigger ones
Some people think that when it comes to equity investing, the biggest players have a clear advantage. However, in some respects, the reverse is true.
Background
Whilst it is undoubtedly the case that the big institutional investors have size, contacts, knowledge and money on their side, they also collectively suffer from a few handicaps. These present an opportunity for smaller investors to outmaneuver them.
The “big fish” challenges
We can divide these challenges into three and will take a quick look at each in turn.
Short-termism
The biggest players in the market all compete against each other to hit short-term bonus targets. This is especially true where a fund has a “hurdle rate” above which the manager earns extra rewards. As such, many find it hard to do nothing, even if market conditions warrant exactly that. Instead they are often tempted into chasing performance and justifying (or trying to justify) their fees.
Smaller investors, on the other hand, do not need to act this way. By setting, and sticking to, long-term goals they can avoid pitfalls such as overtrading and chasing “hot” stocks.
Group-think
As a result of their short-term approach, the biggest investors all tend to behave the same. Worried that they will underperform their peers, they often “crowd” around particular stocks, whether these are growth or income plays. Equally they are forced to buy stocks sometimes that other investors may choose to avoid – a recent example is the so-called “unicorns” technology stocks that have been flooding the market. The result is that contrarian thinking – being “greedy when others are fearful” as Warren Buffett once put it – is relatively rare. This creates another opportunity for smaller investors who are not constrained in the same way and can think a little more independently.
Hubris
As the saying goes, success breeds success. However, it can also breed complacency and even arrogance. As a result, the biggest funds can become the least attractive, which presents another opportunity for more nimble and hungrier players.
Small investors should…
To sum up the approach that can lead the stock market’s Davids to outsmart its Goliaths;
If you would like to discuss any of the points here in more detail, please contact and Investment Manager or email me;
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