My Sunday Washington Post Business Section column is out. This morning, we look at the advantages that the Mom & Pop investor have over the professional. Its titled How you, the amateur investor, can beat the pros — and its not about what you might think.
Here’s an excerpt from the column:
“The pros have the tools, the manpower, the capital, political connections, inside information — everything goes their way. If you try to compete against them on their own field, playing their game by their rules, the outcome is very likely to be what they want: You and your portfolio are toast.
But here is the thing: People who are not professional investors — those Mom and Pop investors I refer to all the time — have enormous advantages of their own.
Today’s column will help you recognize what you don’t have to do, deal with, pay for or worry about. Add all of these things together and you not only neutralize the disadvantages, but you can jiujitsu them to your favor.”
It was a fun column to write, and I think you are going to really like it.
Source:
How you, the amateur investor, can beat the pros
Barry Ritholtz
Washington Post, November 8, 2015
http://wapo.st/1HyVKuW
Unfortunately, 95% of the financial industry is focusing all of their marketing and lobbying resources on convincing investors to give up these advantages. I have found that it took a lot of time and energy to figure out that very simple, easy -to-execute strategies that have low fees are actually the best approach. To get there, you have to wade through a disinformation sea of toxic crap peddled by people who present themselves as trustworthy. However, I am making sure that my kids are being shown the simple approach as they go out into the working world, since the simple low-cost diversified products are out there at the beginning of their career unlike those of us who started working several decades ago. As a result, they are able to focus their attention on the saving problem instead of the investing problem from the beginning.
Barry’s final two points — that individuals aren’t constrained by size and career risk — has an important implication that presumably wasn’t explored owing to word count limits. ;-)
Namely, that individuals are free to use mechanical market timing systems, such as a simple 12-month moving average, to sidestep the bulk of the downside in major bear markets.
Someone, of course, has to hold stocks during bear markets. That someone is institutions, with their fixed allocations dictated by board-adopted investment policies.
A 12-month SMA system just got round-tripped during September and October for a 5.5% opportunity loss. Next time round, perhaps we will be able to conclude a few months afterward that ‘this is not a test.’
More importantly, our small size means that TIPs and small value can play a significant role in our portfolios as a significant percentage of our asset allocation. Since the overall size of those markets is relatively small compared to the huge dollars many institutions have to handle, we can make use of them well while the big guys can’t.
To add to your comment, momentum-based mechanical systems can apply here as well. Pitting small value against large growth, based on which one has performed best over the past year, sometimes does amazingly well. For instance, during the 2000-2002 bear market, small value was basically unscathed, while large growth (think Nasdaq) got an epic trouncing. TIPS vs. corporate bonds is another apt pairing that can exploit the best-performing subsector of the bond market.