As a private investor investing your own money, you have got a huge advantage over fund managers and professional portfolio managers due to facts you may not even know.
Learning how to manage your own money will take time but it is one of the most awarding activities you can learn. You have worked hard for the money you have saved and it would only be smart to invest in the best way possible.
Also with public pension systems falling apart around the world, because of ageing populations, making the most of your savings has become even more important.
Here are the advantages you have over all fund managers and other professional investors.
1. You can wait
As a private investor you can wait for attractive investment opportunities to present themselves. And if you cannot find anything you can stay in cash.
Fund managers do not have this luxury. They have to invest irrespective of valuation.
Holding cash in the fund management world is known as career risk as the fund manager runs the risk of falling behind his peers or some benchmark or index.
The bigger the cash position the higher the career risk.
The best example of career risk is value fund managers losing their jobs because they refused to buy completely overvalued internet companies during the internet bubble.
2. You can invest anywhere and everywhere
As a private investor you can invest in any type of asset in any country that offers an attractive risk return trade-off, be it corporate bonds, equities, options, real estate etc.
Fund managers have to stay in the fund’s investment area. And they have to follow all kinds of regulations that further limit their investment choices.
You can argue that you can change to different fund but that is also actively managing your money.
3. You can invest in any size
This is similar to your ability to invest anywhere and everywhere, as you have the freedom to invest in small or large companies whatever is most attractively priced.
I was recently astounded when I heard of a value fund manager that had to invest in companies that have a high weighting in a particular index because he had institutional investors (large investors in the fund) that would withdraw their funds should his performance deviate too much from the index.
This is madness, why invest with a value manager if all they want is index performance? You want a value manager to do what he does best, search and invest in undervalued companies.
Also you can buy small fast growing companies long before fund managers are even aware of them. This is as fund managers, because of the large amounts of money they invest, only look at companies when they are large.
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4. You have no benchmark
As a private investor you only have one goal in mind, the real (after inflation) after tax growth of your money irrespective of what the market does.
Call me conservative but I do not consider it a good year if I have lost 25% while the market has lost 40%.
I am sure your goal is the same.
Fund managers however only have one goal, beating the benchmark irrespective of return.
I cannot remember how many times I have heard a fund manager say that he has to stay fully invested in his investment area as that is what his investors expect of him.
Just think of what happened to investors in fully invested technology funds as the internet bubble burst.
5. You can focus and ignore
Studying, understanding and applying what has worked in investing are all you need do to be wildly successful as an investor.
You can focus on a few things and ignore the market noise. This means you don’t have to spend a lot of time to be a successful investor.
Fund managers have to have an opinion on everything because they have to appear competent in company and client meetings. It is hard and dangerous to their careers to say “I don’t know” or “I have not looked at that”.
I do not watch financial television. It is a complete waste of time. Mainly yo-yo news of what went up and down.
I have my investment strategies, I look for companies they come up with and I study only that. The rest does not interest me and that saves a lot of time.
6. You have no conflict of interest
This is a big one.
You only have your best interests at heart. In other words all your decisions are in your best interest.
Fund management companies are focused on growing their profits by growing the amount of money they manage. This means giving their investors the best returns is not their main goal.
Fund managers have to think of keeping their jobs, increasing their assets under management and keeping large clients happy. This means that their investment performance is not the most important thing on their minds, or what they spend most of their time on.
Also fund managers working for companies what also offer investment banking services may be pressurised to buy securities of investment banking clients or new listings irrespective of how unattractive these investments may be.
You have none of these problems.
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7. You can take a long view
According to a study by the New York Stock Exchange the average holding period of shares held by investors have declined from five to six years in the 1950’s to 11 months today.
It is unlikely that a company with problems, as an undervalued company inevitably has, can sort them out in such a short period of time.
As a private investor you can follow the company over many years and make huge returns when the market re-values the company.
This may be the biggest advantage you have, the ability to look at a company solely on valuation and hold it as long as it is undervalued.
8. No peer pressure
If you do not discuss your investment with friends or family you will have no peer pressure to buy or sell any investments.
I have gotten to the point that I don't discuss my investments as the response I get is either, “never heard of it” or “what, you must be mad to own that, don’t you read the newspaper?”
Fund managers have a different problem.
The funds they manage are compared to benchmark indices and other funds, including the individual fund holdings. Should the fund stand out in any way it invites questions.
And should the fund’s performance be worse than the peer group or benchmark, career risk increases.
If you manage your own money you have none of these problems.
9. You decide
You make the final decision after you have done the analysis. You may be wrong but at least you decide.
A lot of funds are managed by committees. Apart from the problems of group-think, investment committees are staffed with people throughout the organisation with different investment approaches, not all of which have shown good historical results.
Also it may be difficult to tell your boss that his investment idea stinks if you have your bonus meeting with him later that day.
This leads to bad and sometimes completely stupid investment decisions.
As an investor investing your own money you have none of these problems.
10. You can concentrate
If you find a really attractive investment idea you can choose to invest as large a part of your capital as you feel comfortable with.
With 80% of individual company risk diversified away with as few as 15 investments you can decide what your optimal number of investments is.
Mine is 30, as I feel comfortable with the weighting of each position in my portfolio and I can easily keep track of 30 investments.
When I see funds with 100 or more investments my first thoughts are that they must not have much confidence in any of their ideas.
Also with so many positions you may as well buy the market itself through an inexpensive exchange traded index fund.
11. You control the costs
Controlling costs and fees, the friction of investing, is a very important part of getting good long term results.
With a discount broker I can buy and sell nearly any company in the world for around 1% in fees. If I hold a position for three years that equates to 0.33% per year plus a 0.25% custody fee.
That is a lot lower than funds that charge 1% to 1.5% per year on top of a 5% initial fee and other expenses.
If you add up the extra fees over a period of 20 to 30 years you will quickly see that keeping costs low can make a huge difference to your returns.
12. Down years are more bearable
This goes along with the point on making your own decisions.
Should you have a bad year at least you know you made the decisions, can learn from your mistakes, and make changes to your investment strategy.
Like you, I prefer making my own mistakes with my money rather than let someone else experiment with it.
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13. You can be fully invested
Should you find a large number of attractive investments you can be fully invested and remain so even if the markets declined and you are still convinced of the investment case of each investment.
A fund manager cannot do this.
When markets fall they get redemptions. And in order meet the redemptions they must either have cash available or sell investments.
But when markets are falling liquidity drops as well. That means that because investments have to be sold, liquid investments are sold first. This selling pressure puts pressure on share prices leading the markets to fall further thus triggering more redemptions.
You get the picture.
Some fund managers plan for such eventualities by keeping a certain amount of liquid investments or by keeping an amount of cash on hand.
This, as mentioned in one of the points above, leads to investments not necessarily in the fund manager’s best ideas.
Luckily as a private investor you do not have this problem.
14. You live in the real world
If you or your wife does business with a wonderful company, even if it is small, you can do your research and invest.
Most of the time fund managers are not even aware that these fast growing good businesses even exist – and if they are they are most likely too small for them to even look at.
If you keep your eyes and ears open you can invest in these attractive businesses long before anyone else.
Other advantages mentioned by readers:
15. You can easily buy and sell.
If you have $1 billion of Apple shares selling is not that easy, you must have a plan and it takes time to sell such a large investment.
16. Bad computer decision making.
A lot of investment decisions by funds are largely made by computers with pre-determined stop loss levels which can lead to poor decisions especially when the markets are in panic mode.
17. No bureaucracy
If you speak to fund managers of large organizations it is really crazy how they drive themselves nuts with rules, committees, guidelines, restricted lists etc. You have none of that!
18. Investors are their own worst enemy
When you look at chart of the money flowing in and out of funds you will see that it forces fund managers to buy and to sell at exactly the wrong time.
For example at the time of the internet-bubble, the biggest in flow to internet funds was shortly after the market top in 2000, when private investors wanted to take advantage of a "correction". This meant fund managers were forced to buy totally overvalued assets.
And at the beginning of 2003, just as the markets started to turn up again, redemptions reached their peak, and fund managers were forced to sell undervalued assets.
If you manage your own money you can avoid this emotional buying and selling BUT this is easier said than done so you have to prepare yourself.
Where can you start
How best can I start investing my own money, you may be thinking?
The first thing you have to do is find an investment strategy that you feel comfortable with. In other words a strategy that lets you sleep comfortably every night.
Take a look at our investment strategies page here: The best investment strategies we have tested
Here you can find all the best investment strategies we have tested.
What can also help you is to read about all the most up to date research in our blog which you can find here: Quant investing blog
Look at the following article for more detailed information: Getting Started with Quant Investing
Apply only what has worked
This will give you a good idea of what investment strategies have worked well over long periods of time in up and down markets.
Once you have decided on what strategy or strategies you would like to follow you can implement them with the use of our investment stock screener or you can follow the investment ideas in our investment newsletter.
PS It is so easy to put things off, why not get started right now.
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