Can a retail investor have the edge over professional investors?

 

Professional investors have some advantages over the retail market:

• They have access to better technology.

• They have teams of analysts with years of experience.

• They have access to company management.

• They are serviced by the best sales trading teams in the market.

• They pay lower commissions.

 

But there are some areas where retail investors have an edge:

 

• As a retail investor, you don’t have clients, which means you don’t have inflows and outflows. As a fund manager, you have little control over these flows; when money comes in you have to buy shares and when money goes out you have to sell shares.

• While fund managers hold huge position which can take weeks to accumulate or sell,  retail investors can usually buy or sell their position in minutes.

• Retail investors are not under pressure from clients to reduce trading.

• As a retail investor, you don’t have to chase quarterly performance.

• Retail investors can use stop losses. A fund manager will often be under pressure to stand behind their decisions, whereas a retail investor gets to cut a position and move on.

• As a retail investor, you don’t have to tell anyone what you own. This means you don’t have to have any ego invested in a position.

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Many of these factors can be both a blessing and a curse, depending how they are used.

 

It comes down to knowing and exploiting your edge. As an individual, you are unlikely to understand the fundamentals of a company better than a large fund management team. However, you are in a position to capitalize on opportunities that may present themselves for short periods of time. You can stay with the positions that work, and let go of those that don’t.

 

This doesn’t mean you should trade in an out of shares whenever they move a few percent, but it does mean that when you find you are clearly wrong, you can cut a position.