Why Small Investors Have More Power Than You Think
The Myth of 'Smart Money'
Marcus Padley | 28 November 2024 | Education Corner
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.What Big Investors Can Do That You Can't
There are a few "Smart Money" activities available to institutional investors that most individual investors can’t access. These include:Access to IPOs and Placements
Big institutions often get priority access to IPOs, share issues, and placements. They get it because the brokers controlling the issue want to suck up to them to get their secondary market business.Inside Information
There’s an old broker’s saying—“If you’re not on the inside, you’re on the outside.” Many private investors assume that institutional investors have access to inside information and that the market is rigged against them. But this isn’t the case.
I once stood in a lift with a very experienced professional trader who overheard two brokers discussing an inside tip. In his gravelly voice of experience, he said, “If I’d never been told any inside information, ever, I’d be a million dollars better off.” While inside information might exist, it’s neither legal nor common, even among professionals. The misconception that everyone else has it is simply not true. That’s not the game.Writing Options for Incremental Gains
Wealthy investors sometimes write out-of-the-money call options against existing holdings. While this strategy can generate small, incremental returns, it doesn’t provide substantial gains. It’s also not practical for most individual investors.Why Being a Small Investor Is an Advantage
Despite the perks available to big investors, small investors enjoy significant advantages that professionals can only envy.Liquidity Isn't an Issue
Institutional investors often face liquidity problems, struggling to enter or exit positions without affecting share prices. Small investors can buy and sell quickly without influencing the market. Despite the perks available to big investors, small investors enjoy significant advantages that professionals can only envy.Freedom to Adapt
Unlike fund managers who must follow strict mandates, small investors can shift strategies whenever they like. You’re free to act without needing approvals or explanations.The Ability to Hold Cash
Fund managers often can’t hold cash even when markets drop. Small investors can exit the market and wait for better opportunities, avoiding unnecessary losses.No Need for Over-Diversification
Fund managers must diversify to meet benchmarks, even if it means including underperforming stocks. Small investors can focus on a few high-quality opportunities instead.No Reporting Requirements
Professionals deal with compliance regulations, financial services guides, and audits. Small investors avoid these headaches, saving time and money.Minimal Costs
Running a self-managed portfolio means avoiding the overheads that come with managing large funds. There are no compliance fees, licensing costs, or administrative burdens.Instant Decisions
Small investors can react to market events in real-time. Fund managers, on the other hand, face internal approvals that delay decisions.The Downsides of Being a Small Investor
Of course, small investors do miss out on some perks available to institutional players:No Broker Perks
Big investors enjoy access to IPOs, discounted placements, and premium research. Brokers often court them with lunches and events.Limited Research Support
Institutions have teams of analysts hunting for investment opportunities. Individual investors typically rely on their own research.No Excuses for Losses
While fund managers can justify losses by pointing to market-wide downturns, small investors face personal accountability for their results.Why Flexibility Beats Big Money
Sure, big investors get the perks—lunches, research, and IPOs but they’re also stuck in a system full of rules, reports, and restrictions. Small investors, on the other hand, have the freedom to move quickly, cut costs, and make decisions without answering to anyone. And let’s be honest when it comes to investing, freedom is worth more than a free lunch.
