Have you ever been asked, or maybe asked yourself, can an amateur investor earn money by investing or trading, while there are so-called “professionals” in the same market?
Peter Lynch is a guy who reveals how his amateur approach to investing has led him to become one of the most successful investors of all times. This episode presents some key points from his book One Up On Wall Street
His success shows us that a set of simple, yet powerful rules, can be the basis of a proven strategy that can give you huge wins in the market. Remember, you do not try to beat the professionals. You want to beat the general market, the general public and fund managers who don’t really care about your money.
Peter revealed how you as an individual, yet-to-be investor, can beat the pro. If it is possible, I would be interested. Are you?
In fact, professional investors have many disadvantages compared to the amateur, or retail investor, such as you and me.
- Size: successful money managers will naturally attract a lot of capital, and more capital means less opportunities
It is actually a challenge to have too much money when investing. Can you believe it?
If you manage millions of dollars, and want to invest in companies, you might end up buying entire companies. That might not be desirable, because when such a large player eventually pulls out by selling their positions, the price might collapse, that is due to the fact that a selloff can signal less belief in the company. When owning an entire company, there is no room left for other investors to buy in to signal faith in the company. The point is, having a BIIG account might not be favourable
So, playing at a smaller scale can be an advantage. And especially when you take charge of your own financial future. There is a saying on Wall Street that “you’ll never lose your job losing your clients money in an IBM”. Remember that fund managers have their own agendas, and that they too are employees with jobs that aren’t guaranteed. Playing at the mediocre level is safe. If IBM goes bad and you bought it, the clients and the bosses will ask: ‘What’s wrong with that damn IBM lately?’. Since the company is considered a safe bet, and the saying is commonly known, they can sort of get away with this investment regardless of the outcome and profits
Fund managers tend to spend about 25% of their time explaining to various stakeholders about why they made certain decisions. Unfortunately, stocks aren’t sympathetic enough to yield an extra 25 % for this effort
Another problem fund managers face is that they invest other people’s money, which means other people decide how much money the fund manager has at their disposal. These other people aren’t savvy investors and tend to do exactly opposite of what is the most profitable way of investing. What they tend to do is to pull out their money in bear markets, that is when the market is going down, and put in more money when the market is going up, that is a bull market.
What is the result of this? The dilemma is that the fund manager has more money to invest when everything is expensive, and less money when everything is cheap. You might ask “isn’t that a good combination? Its kind of balances it?” What if it where the opposite way? Then you can buy more at cheaper prices, and you sell with a profit when the price has increased!
Of all the disadvantages I have talked about so far, does the amateur investor has these disadvantages? No
Thanks to Peter Lynch for putting this topic to my attention. https://www.youtube.com/watch?v=s3jzbKW24jw 0-3:11