Three Simple Reasons Amateur Investors Have An Edge Over The Pros
For investors just getting into the game, the process can seem a little bit like a middle school dance. Awkward and inexperienced, they suction-cup themselves to the walls and poke around the punch bowl while bullish professionals stampede the floor and steal all the good deals.
Ever thought you might be selling yourself a little bit short there?
True, most of the competition out there could probably wipe the floor with you on a daily basis. But if you learn to play to your own strengths, there's a good chance you can keep up.
Here are your strengths:
1. You're not obsessed with trying to beat the market
Unlike professionals whose livelihoods depend on trading, you don't have to beat the market. While they go after risky options with a near-term payoff, you can settle back for safer options with long term propspects. You can buy and hold or even just stick to an index fund.
"You can just buy low-cost passive funds," Henry Blodget writes in his book, "The Wall Street Self-defense Manual." "This will guarantee that you will beat most professionals, who are paid to try to beat the market and, therefore, can't buy low-cost passive funds."
After all, just matching the market is hard enough.
Two out of three mutual funds underperform the overall market in a typical year, according to Jack Bogle's Common Sense On Mutual Funds.
2. It's easier managing a little money than a lot
There's something to be said for the luxury of walking around without the weight of a client's multi-billion-dollar fortune on your shoulders. If you screw up, you only hurt yourself. "You have more securities from which to choose, and your transactions will not move the market," Blodget writes. "The manager of a massive equity fund must restrict purchases to large stocks because small ones aren't big enough to amount to a meaningful position in the portfolio."
3. It's much cheaper to fly solo
It's not like beating the stock market is exactly cheap these days. "These investors design and implement expensive computers systems, hire sophisticated traders (who get paid many millions of dollars), and/or pay people for inside tips," writes The Atlantic's Bradford Cornell. And don't forget about the costs associated with living the high-flying Wall Street lifestyle –– those steak dinners and cocktail hours to keep clients happy don't come cheap. At the end of the day, any of these expenses could take a chunk out of anyone's bottom line, no matter how high the market rises.
The bottom line: You should be realistic about the competition out there. As Blodget says, "most professional investors are not stupid or incompetent and believe me, they will be very happy to compete against you." But it doesn't mean you should count yourself out of the game altogether. The key is learning how to come up with a game plan that suits your needs –– because, thankfully, you can.