Why you have the upper hand over large institutional investors

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As a retail investor, do you feel that you lose out to institutional investors since you lack the know-how and tools to do well in the stock market ?

You may not be alone. Many retail investors may feel that way.

However, the idea that retail investors lose out to institutional investors is yet another myth in the investing world .

For the uninitiated, institution investors are the pension funds, mutual funds, money managers, insurance companies, investment banks, and so on.

Here are three simple reasons why you have an advantage over those “big boys”.

Ability to buy into any company secretly

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One of the biggest advantages you have over professional investors is that you can buy any listed stock that you like without any restrictions or liquidity constraints, including the small and obscure ones.

For instance, Warren Buffett’s Berkshire Hathaway can’t simply buy a small-cap stock and build up a sizeable position without moving the market.

As a retail investor, you can also buy more of the same without strict requirements of portfolio weighting.

When a company’s share price falls due to temporary weak market conditions, you can buy more of the company’s stock assuming its fundamentals are still intact.

Time advantage

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Another advantage you as a retail investor have is that you have time on your side.

You can take your time to look at companies and invest in them slowly, over different stages of the market. This advantage also ties in with the previous one.

Since you can invest in the small-caps, you can get in at an early stage of their growth and invest over time as you get more and more familiar with the company.

By the time the company becomes big enough in terms of market capitalisation to be under the radar of institutional investors, retail investors could have made most of the money.

Furthermore, there is no need to chase performance or carry out “window dressing” merely to look good on paper.

Window dressing is a method used by portfolio managers near the end of a quarter to artificially improve the fund performance by selling shares with losses and purchasing high-flying stocks before presenting them to the clients.

The newly bought shares are reported as part of the fund’s holdings.

No one to report to

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Last but not the least, retail investors don’t have to report to anyone (other than being accountable to themselves) when they buy stocks, unlike the big fund managers.

Another huge advantage is that you don’t have to face redemption requests by investors during stock market crashes.

In fact, it is during a bear market that you should be looking to buy more stocks to set your portfolio up for long-term success…

… and not sell those stocks to lock in your losses permanently.

You also don’t have a boss asking why you’re holding on to your stocks amid a crash when you’re “supposed” to be bailing out and buying them back later when the market recovers.

(By the way, market timing is futile , as many studies have shown.)

Conversely, when the market is on a high, there is usually a flood of fresh funds from investors, and this means that money managers could be forced to buy shares when they are excessively valued.

But as a retail investor, you can let your cash accumulate and not let the market decide when you should invest.

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This article was first published in Seedly. All content is displayed for general information purposes only and does not constitute professional financial advice.