The Motley Fool

The 3 Advantages You Have Over Large Institutional Investors

Many retail investors think that they are losing out to institutional investors as they lack the insights and tools to do well in the stock market. However, that is far from the truth. Here are three advantages you and I have over the large investors.

Buy into any company

One of the biggest advantages we have over professional investors is that we can invest in any stock we like without facing any restrictions or liquidity constraints. For example, Warren Buffett’s Berkshire Hathaway can’t invest in a stock with a small market capitalisation and build up a sizeable position without moving the market. When the market comes to know about his company’s purchases, the stock price would likely have increased significantly.

Retail investors like you and me can also build a portfolio without strict restrictions on portfolio-sizing. When a company’s share price falls, we can buy more shares, assuming the business fundamentals of the company are still intact.

Long-term horizon

Another advantage retail investors have over large institutional investors is that we have time on our side. We can take our time to look at companies and invest in them slowly, over different stages of a market cycle. This advantage also ties in with the previous one. Since we can buy into small-cap stocks, we can invest in a company at an early stage of its growth and invest over time as we gain familiarity with the business. By the time the company becomes large enough for institutional investors to notice, retail investors would have made most of the money.

Furthermore, there is no need to chase performance or carry out “window dressing” to look good on paper. Window dressing is a method used by portfolio managers near the end of a quarter to artificially improve the “look” of their funds by selling losing shares and purchasing high-flying stocks before presenting the newly-bought shares as part of the portfolio to clients.

Do our thing

Retail investors also don’t have to report to anyone (other than being accountable to ourselves) when investing in a company. This is unlike institutional investors, whose flexibility may be hampered by reporting requirements.

We also don’t have to face redemption requests by investors during market downturns. It is during downturns that we should be looking to buy more stocks to set our portfolio up for greatness. Conversely, when the market is on a high, there is usually a flood of fresh funds from investors, and this means that institutional investors are forced to buy shares when they are overvalued.

The Foolish takeaway

Contrary to popular belief, retail investors have many advantages over professional money managers, even if the latter group have sophisticated tools to analyse markets. The advantages that retail investors have include the ability to (1) buy into any kind of company; (2) slowly build up our positions over the long-term; and (3) invest peacefully during market crashes. Are you using your advantages?

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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 Sudhan P doesn’t own shares in any companies mentioned.