The biggest advantage of a small investor in the stock market is being small, which enables him to do things that big investors -- institutions such as mutual funds or pension funds -- cannot do because of their size. Size is the biggest limitation in the stock market that prevents many institutions from producing superior returns or even outperforming the market.
A small investor can always allocate his capital to the best stocks and ignore the rest, which gives him the opportunity to achieve superior returns. A large institution with billions of dollars under management cannot invest exclusively in those leaders because it has too much money, which it has to spread across hundreds of stocks, many of which are mediocre. Diversification rules can limit an institution's exposure to a winning stock to a certain percentage of assets, while forcing it to maintain similar percentages in mediocre ones. A winning stock can also be too small or cheap for an institution to buy, whereas a small investor does not have to concern himself with a company's size or stock price as long as he is making a profit.
Few institutions can practice market timing because they can't enter and exit the market at precisely the right times: Their stock positions are so large that they may take months to build and weeks to unwind -- too slow for effective market timing. Institutions therefore stay in the market all the time, whether market conditions are favorable or not. A small stock investor can go from cash to fully invested, and back, in a day.
A small stock investor can quickly adjust to changing market conditions by going where the profits are: He can buy small-cap stocks or large-cap stocks; own just one stock or 20; stay in cash or go on margin; or even short stocks in a declining market. Many institutions such as mutual funds must always stick with their stated investment objectives, whether or not those currently offer profitable opportunities.
Freedom and Personal Responsibility
A small investor answers only to himself. If he is happy with the results, that's all that matters. An institution is a huge bureaucracy that must operate according to a multitude of rules and regulations such as owning only stocks that meet specified parameters, posting monthly, quarterly and annual results, and following federal regulations and internal compliance rules. Many institutional money managers spend a lot of time of time explaining or justifying their actions to investors and superiors, while a small investor can spend all his time picking stocks or honing his trading skills.
- "How to Trade in Stocks"; Jesse Livermore; 2001
- "How to Make Money in Stocks"; William O'Neil; 2009
- "Stan Weinstein's Secrets from Profiting in Bull and Bear Markets"; Stan Weinstein; 1988
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