Interviews, Investing

Do You Have An Advantage Over Large Institutional Investors?

By Kanwal Sarai
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MarketI've often heard the phrase "You can't beat large institutional investors, they have access to more information!" I disagree, an individual investor has the advantage of being small, and being able to hold a long-term perspective.

Here's what Motley Fool had to say about the advantage of being a small investor:

"While Buffett has buying power and access to deals ordinary investors can only dream of, there's one area where Buffett himself concedes that the small investors have the advantage.

Business Insider noted that Buffett finds it more difficult to achieve high percentage returns on Berkshire's current investment portfolio than to manage a much smaller amount of money.

It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.
In managing Berkshire Hathaway's multibillion-dollar portfolio, Buffett needs to produce huge gains in absolute terms to post meaningful percentage returns. While a typical investor with a $100,000 portfolio would see a 50% return from a gain of $50,000, a $50,000 gain for a $1 billion portfolio would only amount to a gain of 0.005%. Berkshire would need many more winning investments to produce a 50% return. Furthermore, when a small investor finds an investment with good return potential, he or she can move a large portion of their portfolio into it. However, with the amount of money under management at Berkshire, only a small part of the overall portfolio could be invested before Berkshire has essentially bought out the company or pushed its price into overvalued territory.

Investors with small portfolios have the advantage of being able to produce outstanding percentage returns. So while you can't get access to Buffett's special deals, you can still profit from finding undervalued investment opportunities too small to move the needle for Berkshire."

Last year Globe & Mail interviewed 12 investors, from Bay Street to Wall Street to Silicon Valley, about how to make money now. Here's what Charles Brandes had to say about small investors versus large investors:

You say individual investors have a big advantage over institutions. How so?

The conventional wisdom is that the institutions always have an advantage over the little guy, and you can’t fight Wall Street. That is wrong. The institutions have the same behavioural handicaps as individuals. However, they can’t overcome them, because there is so much pressure in the short term for institutions to perform.

Therefore stop worrying about what large institutional investors are doing, as a small investor you have the advantage. Focus on buying quality dividend paying stocks when they are undervalued and you will do very well for yourself.

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