Warren Buffett have been called the legend of investing, but he envies you.

With over $300 billion dollar worth of business, Warren Buffett himself is worth more than many fund managers combined.

But even with the talent of Warren Buffett, you as a small investor will have huge advantages over him, or the rich fund managers of the wall street.

Being big with lots of cash don’t always makes things better, sometime being small is better.

Let’s uncover the secrets that rich fund mangers don’t want you to know.

Here are some of the advantages of small investors, that rich fund managers of the wall street keep you in the dark.

Let’s Dive In!

4 Advantages of Small Investors

During one of Warren Buffett’s interviews he said these words:

“The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then.

It’s a huge structural advantage not to have a lot of money.

I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.

But you can’t compound $100 million or $1 billion at anything remotely like that rate.”

Small investors like us have a huge advantage over the fund managers just because we are small.

As a small investor, the young Warren Buffett, he will probably able to make 50% return a year on $1 million.

With the right knowledge, you too may able to get high returns.

Maybe not 50%, but definitely much better return than most fund managers.

Here we will show you why.

1. Nimble

Small investors are nimble to enter or exit the stock market.

As a small investor, you will probably buy just a few hundred shares each trade. To you, this is a lot of money, or even your whole net worth.

But compared to the stock market as a whole, the amount you just brought might be just peanuts. Even if you sell everything the price of the stock will not be affected.

Having a small position in the stock can be a huge advantage over the big players, who have millions of dollars invested in each of the stocks.

Why?

Having a small position means you can buy, or sell as and when you want. Even when there is panic sell during the bear market, it will be fairly easy for you to sell everything you own. 

(Panic Sale is dangerous! Read: 7 Deadly Sin of Beginner Investor)

Small Investors

When buying a stock, you can can probably buy within a split second simply with a click of your mouse.

When selling, it will probably be done in less than a second.

The transaction is fast and simple.

Fund Managers

Big fund managers when investing, they buy millions of dollar of a particular stock. This simple transaction will probably take days or even weeks.

By the time they finish buying, the price of the stock may have already risen significantly.

When it is time for them to sell, these fund managers will need to take a long time to sell their position as well. As they are selling off their stock, it moves the price of the stock down.

By the time they finish selling, they will pocket much lesser profit then they have wanted earlier.

Conclusion: Small Investor Win

Small Investor Advantages Nimble

2. More Options

“Yes, you have more options available to invest than Warren Buffett, or all of the big fund managers.”

Small Investors

Small investors, don’t require to make millions of dollars in profit to make an impact to your investment portfolio.

Investing in small companies, or large companies don’t really matter much, as long as we earn a profit.

When we found a great company which have the potential of giving us a 100% return, we can just buy that $100,000 dollar shares with a click of the mouse.

Although making 100% return in a year is hard for commoners like us. But it is still not impossible.

There are small companies which give amazing returns, investors usually call them them the ‘unicorns’.

Although ‘unicorns’ are rare, but they can easily be found in small caps company. Companies that we as small investors can buy and big fund managers ignore.

This means we have much more options to invest than any of the fund managers.

Some of these unicorns are 10-bagger (10 times your investment return), an great example is Amazon Inc. or Apple Inc. They were once small caps which have become a mega multi-billion dollar company. If you have invested in them 10 years ago, you will probably make tones of money.

Fund Managers

Big fund managers, on the other hand are handling billions of dollars everyday. Earning a few million won’t help them in their investment return. The need hundred of millions of profit to even see some significant change to their returns.

In other words, all small companies (Small Cap) are just too small for them.

(Just for context, in the U.S. market, all companies under $1 billion are consider small companies.)

Even if the small company is a really great company with a healthy balance sheet and high growth potential, there is no point for a fund manager to invest in it.

Simply because the company is too small, and the profit is simply too insignificant for the effort they have to put in. 

For every investment of a company, they have to put in tens of hours on research to see if it is a good investment.

The time can be better spend on investment that truly makes an impact to their investment portfolio.

Example

Google Inc. (GOOGL) was once a small company which have turn into one of the biggest company in the world.

If you have invested $1,000 in GOOGL in the year 2009, when it is a big company, you will be holding more than $4,800 in the year 2019, for a total return of almost 500%.

That is a compound annual ROI of 16.98%.

I will think that is a pretty good investment with $1,000.

But if you have invested $1,000 in GOOGL in the year 2004, when it is still consider as a small company, you will be holding more than $30,460 in the year 2019, for a total return of over 3,000%!

That is a compound annual ROI of 25.58%.

I will think that is just mind blowing.

You get the potential of a 3,000% return if you invest in a smaller company. But just a “low” 500% return when GOOGL Inc. have already become a fairly large company.

Conclusion: Small Investor Win

Small Investor Advantages More Options

3. Control

Small Investors

Small investors have more control on their investment. As a small investor, you can invest when you choose to.

Unlike the fund managers, you don’t have hundreds of people breathing down your neck, telling you what you should do next.

If the market is overvalued and show signs of the market crash, you can sell of those stocks which you think are overvalued. 

Unlike the fund managers, when the the price falls, this may even give you an opportunity to profit from the market crash.

When you are in control of your investing decision, you are able to prepared for the market crash.

Fund Managers

Fund managers on the other hand, don’t have that much control as you do. As a fund manager, they are expected to keep on investing.

Fund Managers have to be kept invested in the market even if they know the market is overvalued.

If a fund manager stop buying stocks and keep the funds in cash. The investors who have given the money to the fund manager, will withdraw their money and give it to another fund manager.

Most investors are impatient, they want to see their money doing something, even when the best decision for investing is to do nothing and wait for an opportunity.

(For the fund managers, it is like having a bunch of people keep shouting at you to swing the bat at a baseball match even when the ball throw at you is outside of your reach.)

Thus, these poor fund managers will have to invest all the funds (most of it) in some stocks, even if they know the market is overvalued, or a market crash is coming.

Difference in Control of a small investor and a Fund Manager

Small investor can do these 3 actions with the money you have when investing:

  1. Sell a stock
  2. Buy a stock
  3. Wait and see

You can sell the stock when you want, or buy a stock with the cash you have. Or when you think it is not the right time to buy a stock, or sell the stock, simply wait and see. Opportunity comes at unexpected times.

Fund Managers can do these 2 actions with the money they have when investing:

  • Sell a stock
  • Buy a stock

Fund managers can sell a stock, or choose to buy with the cash they have. But they can’t let the cash do nothing and wait for an opportunity to buy when cheap. If they wait too long, the impatient investors who give the money to the fund manager to invest will withdraw all the money.

The fund managers, will eventually loss their job.

Lesson: Fund managers can’t let their funds do nothing and wait.

But in investing, sometimes doing nothing and wait for the opportunity to come is better than doing something.

Charlie Munger, Vice president of Berkshire Hathaway Inc. and friend of Warren Buffett advice said,

“You don’t make money when you buy and you don’t make money when you sell. You make money when you wait.”

Fund managers can’t wait, but small investors like you can.

Conclusion: Small Investor Win

Small Investor Advantages More Controls

4. Risk

Small Investors

Small investors can choose your own level of risk. 

As a small investor, you can choose to either invest in some riskier stocks with the potential of extremely high return on the investment.

Or if you want a lower risk investment, you can invest in ETFs or blue chip stocks.

The choice is yours.

The controls in your hand to decided the level of risk you want to take.

Fund Managers

Fund managers don’t have this luxury of choice. They need to perform inline with the benchmark investment.

In other words, they have to give up the potential stocks that give a good return, and purse a proven path of average return.

The choices that fund manager have when investing, is basically limited.

Even when they have the ability, knowledge and resources available to make amazing return. They are not able to buy that investment, simply because the policy of the firm doesn’t allows them.

Conclusion: Small Investor Win

Small Investor Advantages Choice of Risk

My Takeaway

Small investors have many advantages over huge fund managers.

There are many pros of being a small investors, but before start to invest, there is something we need.

Knowledge

Knowledge is what differentiate a successful investor from a gambler. Successful investors like Warren Buffet is successful, because he have the right knowledge to make the right decision to buy or sell a stock.

Combined with the right investing knowledge and advantages of being a small investor. You have the potential of getting a high return of your investment.

Successful investors like Warren Buffett read approx 500 pages a day.

Knowledge on investment can be learn from books or articles like this one. Reading can only make you wiser and smarter, so that you too maybe able to make the right decision in your investment.

Will Durant Said:

“Education is a progressive discovery of our own ignorance.”

 

My Library

Best Collection

Here we have selected a whole library of some of the best books you should read to learn more about financial education.

You can Visit My Library to explore some of the best books in life.

You will love it!

PS. If you want it badly enough to be financially freed and have control on your own life, you will do what it takes to achieve it!

Check out our next article and find out how!

Smarter Today Library

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Disclaimer: I am not your financial adviser or lawyer, information found in our website are just my opinions. You should always ask your financial adviser or lawyer for any financial or law related advice.

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