The Small Investor Inferiority Complex
If you're like me, you're an "amateur" investor. We come from all walks of life and from all over the world. Besides having an innate passion for making money, researching stocks, and minding our portfolios, we might not have much in common.
But I was startled to discover that all us independent folks have one flaw in common...
And that's a massive inferiority complex when compared with institutional investors.
We've been indoctrinated by the media, by movies like Glengarry Glen Ross — off Wall Street, I know — and Wolf of Wall Street, to believe that these men and women are a breed apart. And we're made to believe that they're snarling psychopaths with moneymaking capabilities the public can't even fathom.
I was nervous when I entered the financial world. I'd thought it would be cutthroat. I'd thought I'd have to skirt around dead-eyed Michael Douglas-types who'd want to make millions, lose it all, then get it back all overnight.
But then I met Charles Mizrahi. And he showed me something that absolutely blew my mind...
Independent investors like you and me actually have some huge advantages over the big firms on Wall Street.
Let me show you...
A Short-Term Investment Horizon
Wall Street firms are worried about managing their assets. One of the principal concerns of any big firm is how to retain their assets while still accumulating more.
This has created a business environment where investors are more concerned with short-term results than long-term payouts.
And it's resulted in investors who are more concerned with beating the firm down the street than accumulating wealth.
For example, if fund A is down by 20% and fund B is down by 18%, the manager of fund B still thinks they're killing it.
It's like that old adage about running from a bear. You don't have to be faster than the bear. You just have to be faster than the guy next to you.
Wall Street investors don't think about outrunning the bear. They're instead worried about the other guys week by week — not their overall performance...
There are a large number of funds that have at least $10 billion in assets. And in the investing game, size does matter. But the massive size of these funds limits the stocks that they can invest in. In fact, this restriction will hinder their abilities to outperform the S&P 500 Index.
A company with that kind of backing can't even consider a stock with a market cap of under $1 billion. Even if it bought 5% of the stock, or $50 million, that amount wouldn't be enough to move the needle on the firm's performance.
There are over 7,000 publicly traded stocks on the New York Stock Exchange (NYSE). But the Wall Street guys are limited to an incredibly small pond...
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A Restricted Investment Universe
A sector fund can only invest in the sector or category that's stated in the fund's prospectus. For instance, if the fund happens to be a bank sector fund, there's no way for it to invest in a retail fund. The same goes for states or countries that fall outside of the fund's stated objective.
So, even if there were a great company trading at an extremely attractive price outside of the fund's sector or geography, the portfolio manager's hands are tied...
Do you want to know what our advantage is over these guys?
As small investors, we have none of these restrictions.
We can make big or small plays in whatever country, field, or sector we like…
As Charles once put it to me, for small investors, the market is like standing in line for an all-you-can-eat buffet in Las Vegas. We can go with whatever dish, and as much of it, as we like.
The institutional investors are at the same buffet. But it's like they all have high blood pressure, heart disease, and diabetes. Their options at the buffet are severely limited and pretty bland.
For me, my discovery of this advantage transformed what was once a feeling of inferiority into a renewed sense of confidence.
I've found that Charles has a serious knack for this kind of educating.
He takes complicated concepts and renders them simple by using accessible down-home logic.
And you'll find lessons like this in his latest book: "Hitting Wall Street's "Fat Pitch."
Contributing Editor, Park Avenue Digest