What Rich Fund Managers Don’t Want You to Know | 4 BIG Advantages of Small Investors
Warren Buffett has 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 doesn’t always make things better, sometimes being small is better.
Let’s uncover the secrets that rich fund managers don’t want you to know.
Here are some of the advantages of small investors, that rich fund managers of wall street keep you in the dark.
Let’s Dive In!
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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 fund managers just because we are small.
As a small investor, the young Warren Buffett will probably be able to make more than 50% return a year on $1 million.
With the right knowledge, you too may able to get high returns.
Maybe not 50%, but definitely a much better return than most fund managers.
Here we will show you why.
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Small Investors Are Nimble
Small investors are nimble to enter or exit the stock market, and they are nimble enough to get out of the stock market when they want to.
As a small investor, you will probably buy just a few hundred shares in 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 a panic sale during the bear market, it will be fairly easy for you to sell everything you own.
(Panic Sale is dangerous! Read 7 Deadly Sins of Beginner Investor)
Small Investors
When buying a stock, you 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 dollars 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 than they wanted earlier.
Conclusion: Small Investor Win
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Small Investors Have More Options
“Yes, you have more options available to invest than Warren Buffett, or all of the big fund managers.”
Why?
Here is the difference between a small investor and a large fund manager.
Small Investors
Small investors, don’t require to make millions of dollars in profit to make an impact on 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 that has 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 a 100% return in a year is hard for commoners like us. But it is still not impossible.
There are small companies that give amazing returns, investors usually call them the ‘unicorns’.
Although ‘unicorns’ are rare, they can easily be found in small caps companies. 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 that have become mega multi-billion dollar companies. If you have invested in them 10 years ago, you will probably make tons of money.
Fund Managers
Big fund managers, on the other hand, are handling billions of dollars every day. Earning a few million won’t help them in their investment return. They need hundreds 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 considered 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 of research to see if it is a good investment.
The time can be better spent on investment that truly makes an impact on their investment portfolio.
Example
Google Inc. (GOOGL) was once a small company that has turned into one of the biggest companies 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. has already become a fairly large company.
Conclusion: Small Investor Win
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Small Investors Are In Control
Small investors have more control over their investments. As a small investor, you can invest when you choose to.
Unlike 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 shows signs of a market crash, you can sell those stocks which you think are overvalued.
Unlike fund managers, when 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 as much control as you do. As fund managers, 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 stops buying stocks and keeps 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 thrown 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 Between A Small Investor And A Fund Manager
Small investors can do these 3 actions with the money they have when investing:
- Sell a stock
- Buy a stock
- 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 do not have the option to let their cash do nothing and wait for an opportunity to buy an attractive stock when it is 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 lose their job.
Lesson: Fund managers can’t let their funds do nothing and wait.
But in investing, sometimes doing nothing and waiting for the opportunity to come is better than doing something.
Charlie Munger, Vice president of Berkshire Hathaway Inc. and friend of Warren Buffett’s 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
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Small Investors Can Control Their Risk Level
Investing is risky, but that is if you don’t know what you are doing. Smart small investors know how to control the level of risk they are having.
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 an 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.
With the controls in your hand, you can decide the level of risk you want to take.
Fund Managers
Fund managers don’t have this luxury of choice. They need to perform in line with the benchmark investment.
In other words, they have to give up the potential stocks that give a good return and pursue 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 an amazing return. They are not able to buy that investment, simply because the policy of the firm doesn’t allow them.
Conclusion: Small Investor Win
Read Also: Ways to profit from a Market Crash
My Takeaway
Small investors have many advantages over huge fund managers.
There are many pros to being a small investor, but before starting to invest, there is something we need.
Knowledge
Knowledge is what differentiates a successful investor from a gambler. Successful investors like Warren Buffet are successful because they have the right knowledge to make the right decision to buy or sell a stock.
Combined with the right investing knowledge and the advantages of being a small investor. You have the potential of getting a high return on your investment.
Successful investors like Warren Buffett read approx 500 pages a day.
Knowledge of investment can be learned from books or articles like this one. Reading can only make you wiser and smarter so that you too may be able to make the right decision in your investment.
“Education is a progressive discovery of our own ignorance.”
Will Durant
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Antony C. is a dividend investor with over 15+ years of investing experience. He’s also the book author of “Start Small, Dream Big“, certified PMP® holder and founder of IncomeBuddies.com (IB). At IB, he share his personal journey and expertise on growing passive income through dividend investing and building online business. Antony has been featured in global news outlet including Yahoo Finance, Nasdaq and Non Fiction Author Association (NFAA).
