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2 Ways Retail Investors Have an Advantage over Professional Fund Managers

Professional fund managers give us the image that they have access to way more investing-related resources that we, retail investors, do not.

Yet, study after study show that most actively-managed funds underperform the market.

So, if professional fund managers are no better than you or me, is it possible for retail investors to actually have an advantage over the pros? Why yes – and here are two ways in particular where I feel retail investors have the clear advantage.

1. We can think long-term

If a fund manager’s year-end bonus depends on his or her performance over that year, there might be a strong motivation for him or her to have investing horizons of 12 months or less.

Even if a fund manager feels that an investment is great for the long term (over decades), it is highly unlikely that he or she will hold the investment for the requisite period of time due to year-to-year fluctuations.

Fund managers not only need to answer to their investors, they need to answer to their employer as well. Such pressures simply do not allow a fund manager to make great long-term bets.

As for retail investors, we are managing our own money at our own pace. We answer to no one but ourselves (or our family) and we can make decisions based on long-term thinking without worrying about losing our job or underperforming for a few months.

2. We can be true contrarians

In investing, it is very hard to be wildly successful by following the crowd. As Warren Buffett once said, the key to investing is to “Be fearful when others are greedy and greedy when others are fearful.” That is why most successful investors consider themselves to be a contrarian, someone who can go against popular opinion.

However, for a professional fund manager, there is an element of career risk involved if he or she tries to be a contrarian. It is safe, from the fund manager’s point of view, to invest in a company in which everyone else is also investing in. If the company appreciates in price, the fund manager is seen as being smart. But if the company declines in price, he or she can point out the fact that many other fund managers have also made the same mistake and deflect the blame.

For fund managers, it can be very hard to invest in a small and untested company like Sarine Technologies Ltd (SGX: U77) back in 2009 when it had a market capitalisation of less than S$50 million. If the investment goes wrong, the fund manager would look very stupid and would have to bear all the blame. So, to play it safe for the sake of their careers – and frankly, it’s only human to do so – they might choose not to invest in the share despite the positives the share might have had at that point in time (on a related-side-note,  Sarine is up more than 3,000% over the past five years).

Foolish Summary

Although I have to admit that there are fund managers in the market who have managed to consistently outperform the market, think long-term, and be true contrarians, they are far from the norm and few in numbers. That’s why we have to understand that the best fund manager to manage our money is perhaps, always ourselves.

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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 contributor Stanley Lim doesn’t own shares in any companies mentioned.