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The Biggest Edge You Have Over Professional Money Managers

It’s perhaps natural for some to believe that individual investors like you and me are at a complete disadvantage when pitted against big institutional investors (i.e. professional investors with control of huge amounts of capital).

There’s a modicum of truth behind such a statement, because let’s face it – as individual investors, we simply lack the type of resources that big professional money managers might have in terms of research capabilities, analytical support, technology, or even access to the ‘business grapevine’.

But, to say that we are at a complete disadvantage due to the factors above would be – to put it mildly – a preposterous statement, in my opinion.

Consider this fascinating anecdote. In the 1980s, money manager Robert G. Kirby wrote an article titled The Coffee Can Portfolio in which he detailed a personal experience he had with a client of his in the 1950s.

Kirby had been working with a woman client for 10 years – during which Kirby helped her to make portfolio decisions such as switching in and out of shares and lightening positions – when her husband passed away abruptly. Upon her husband’s death, Kirby’s client wanted him to handle the husband’s portfolio of investments as well.

When Kirby received the list of the husband’s assets, he was “amused to find that [the husband] had secretly been piggy backing [Kirby’s firm’s] recommendations for his wife’s portfolio.” As the primary contact between his wife and Kirby, the husband had a first-hand look into the recommendations made by the investing firm. But, there was a significant difference in how the husband piggy backed Kirby’s advice: The husband only followed the buys and ignored the sell calls.

That twist resulted in the husband’s portfolio being vastly bigger than the wife’s, where there was “one jumbo holding worth over $800,000 that exceeded the total value of his wife’s portfolio.” Bear in mind that that was only one holding within the husband’s portfolio of many other shares.

For Kirby, the revelation – that buying and then holding shares of great companies for the long-term had generated way superior returns as compared to more active buying-and-selling – formed the basis for the Coffee Can Portfolio.

He explained, “The Coffee Can portfolio concept harkens back to the Old West, when people put their valuable possessions in a coffee can and kept it under the mattress. That coffee can involved no transaction costs, administrative costs, or any other costs. The success of the program depended entirely on the wisdom and foresight used to select the objects to be placed in the coffee can to begin with.”

To align with the spirit of the Old West’s coffee can, Kirby proposed a solution: Pick a group of 50 shares with desirable investable-qualities, buy them all in equal proportions, and then simply hold them for a decade or more. The logical basis for outperformance in that sort of portfolio is simple. “First, the most that could be lost in any one holding would be 2% of the fund,” wrote Kirby. “Second, the most that the portfolio could gain from any one holding would be unlimited.”

Unfortunately, Kirby didn’t act on his solution even when he thought it was a brilliant idea. The hurdles involved with assembling a team of professionals for that kind of portfolio construction would be too high to surmount, in his opinion. In addition, he was very wary of career risk as he thought the product simply wouldn’t take off with clients – “who is going to buy a product, the value of which will take 10 years to evaluate?”

The latter fear, friends, is the biggest edge that individual investors like you and me have over professional money managers. We simply have no career risk to fret about (we can’t fire ourselves, can we?) such that we can execute the best portfolio management and individual stock selection ideas we have at any one point in time.

Kirby’s essence of the Coffee Can Portfolio – long term investing –  has great merits. In Singapore for instance, the Straits Times Index (SGX: ^STI) has been shown to have dramatically lower odds of making losses the longer an investor holds on to it.

Additionally, great shares would sometimes take years to blossom in terms of share price returns despite its business getting stronger with each passing day. A case in point would be healthcare operator Raffles Medical Group (SGX: R01). On March 1999, shares of the company were going at S$0.56; some nine-and-a-half years later on November 2008, it was still at S$0.55. During that period, its earnings were anything but flat as it grew by 512%.

Today, shares of the company are trading at S$3.70, representing a 561% gain since March 1999, or an average of 13.3% per year. Investors without the requisite patience for long-term investing would have missed out on great returns.

Foolish Bottom Line

It was frankly, quite stunning for me to see Kirby being unable to act on a great investing strategy due to factors (i.e. carrier risks) that were not at all related to the efficacy of the strategy in question. As individual investors, we have the luxury of not having to worry about that in our own investing activities.

Yes, it is that true institutional investors have an edge over us in certain aspects of the investing game. But that’s why individual investors like you and me have to make full use of whatever comparative advantage we might have over the big boys. Being able to invest for the long-term – a wise investing strategy, I should add – without worry of losing that cushy investing job is one such advantage. Grab it.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Raffles Medical Group.