Beginner Education: Why its better to be a Small investor


I have never liked the expression “Smart money.” It is demeaning to individual investors and used by the finance industry to imply they are smart and the rest of you are by implication “Dumb”. But a lot of supposedly smart professionals do some very dumb things, and a lot of non-professional investors (you guys) do some very clever things.

There are only a few “Smart Money” activities, inaccessible to the mortal investor. They include:

  • Access to IPOs, share issues, placements. Being given larger allocations of hot new issues is something only the big institutions get, and they get it because the brokers controlling the issue want to suck up to them to get their secondary market business.
  • Inside information. There is a broker’s saying that “If you are not on the inside, you’re on the outside” and a lot of private investors think that this is how everybody else makes their money and some would tell you that the stock market is one big Machiavellian plot of big money with inside information exploiting small money investors. But it’s not. Let me give you a story. I once stood in a lift with a very experienced professional trader who overheard a couple of brokers talking about an inside tip. He piped up in a gravelly voice of experience. “If I’d never been told any inside information, ever, I would be a million dollars better off.” I’m sure inside information is around and good luck to those that have it. I’m sure you can be considered “Smart” if you can use it to make money and not get arrested. But it's not legal, and it's not commonplace in or out of the industry. The main misconception of those outside the industry is thinking everybody else has it. Quite simply, they don’t. That’s not the game.
  • Writing options. Some of the very wealthy investors do very little other than constantly write out of the money call options against large existing holdings in the big stocks. They do not write naked calls; they own the stocks. But this will only ever achieve incremental gains, a few percent maybe, over and above the total return of that stock.

The truth is that what most people call smart money, is not really smart money, it's just “Big Money”. Big money is institutional money, fund manager money, money that attracts the attention of brokers that can deliver an advantage by prioritizing the big money when it comes to accelerated shares issues at a discount, share allocations to IPOs and are able to offer them private placements at a discount without using a Product Disclosure Statement.

But before you have a whinge about those privileged institutions with big money getting favours from their broker mates, let me tell you, there are a host of advantages for people like Self-Managed Super Trustees running “Small money”. I have collected some of them. This should make you feel better about the big end of town.

The advantages of being a small investor.

  • Liquidity issues don’t matter. Moving prices when you decide to buy or sell is a big issue for fund managers. When you buy and sell you don’t affect the share price in a counterproductive way. You get better and quicker execution.
  • You don't have a mandate controlling what you do. You can do what you want.
  • You can change what you do at any time without reason or explanation.
  • You don’t have to publish an investment philosophy and strategy and stick to it.
  • You don’t have to stay invested when the market falls over, you can sell. Most fund managers can’t, their mandate limits the size of their cash holdings.
  • You don’t have to boringly diversify and include stocks because they are a big part of a benchmark.
  • You don’t have competitors screwing with your state of mind.
  • You can walk away without anyone knowing or minding. You can take the day off. You can take a month off. You can take a year off. You can stop managing funds forever without one email asking you why.
  • If you buy an ETF or a LIC and it's not seen as a “failure” (it is for a fund manager).
  • You are not criticised. Reputation doesn’t matter. You don’t lose your job if you underperform.
  • You don’t get emails from your investors distracting you from the job in hand.
  • If you get it wrong you don’t lose investors.
  • You don’t have any compliance issues burning time and money. You don’t have to publish let alone comply with your FSG. You don’t have to pay for a compliance manager. You don’t have the threat of ASIC turning up at your door with a “Please explain”. You don’t need an AFSL. You don’t have the cost of an AFSL. You don’t have the administration of an AFSL.
  • You have almost no costs.
  • You don’t have to justify your decisions to a committee.
  • You can react to events almost instantly.
  • You can use mechanisms like stop losses if you want.
  • No one is comparing you to a compounding benchmark with no costs.
  • With today’s technology you have almost identical tools to a fund manager.

On the flip side

  • You don’t have brokers buying you lunch
  • You aren’t given access to IPOs because you’re a good client.
  • You don’t get to read the research before everybody else does.
  • You don’t have $200,000 analysts finding stocks for you.
  • If you lose millions in a correction it's not OK just because everybody else’s performance was terrible as well.

The bottom line is that being a “Small Money” investor is a big advantage because you have the freedom a professional investor would love.

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