reasons that individual investors can beat the market, and beat the pros
I often find people expressing shock when I tell them that I manage my own money. I am occasionally lectured about how stupid that is, and I am occasionally chastised by people for being so reckless.
After selling a business last fall my former biz partner and I were called, visited, emailed, and sometimes even stalked by no small number of hedge funds and banks and investment managers and more. The attornies that helped us with the sale process went so far as to tell the investment guys we eventually selected that in exchange for referring us to them, the money guys had to swear to not allow us to manage our own money or put it all in stocks. Thats not a joke.
The hedgies more than once told us that we couldn't possibly figure out the compexities of the modern market. One very prominent hedgie (posts on the web, often on CNBC, you'd probably all know his name) went so far as to yell at my biz partner and I about how stupid we were for managing our own money and that it was not a question of if we'd lose it all, just a question of when. He was rude to an extent that bordered on the comical.
Others taunted us as the market fell. They'd call in late february and say, mockingly, "so, checklist, the markets been down, how are your investments doing? we're short the market so we're slightly up". That outfit was short REITs and Casinos and Banks right up to mid-march. I wonder how that ended for them? Oh, wait, i talked to them a while ago, they were up 5% on the year. Atta boys, sucks getting caught in the worlds biggest short squeeze.
The common sales pitch with these investment pros is that a little old nobody like me can't possibly grasp it all. Yes I ddi well in business, but this is something different, this is what we do, this is what we work on. You, checklist, are good at ABC, we are good at investing.
But the thing is this: all the hedgies we talked to were short the sotcks most out of favor. Casinos, REITs, banks, insurance. They were long stocks like Monsanto and Wal Mart and stuff. They were, basically, exactly following popular opinion at the time.
All the more mundane funds were long the same crap. Google, Apple, Wal Mart, McDs, Exxon, Amazon, etc etc etc. They were long big cap names, probably because their funds are just too freaking big to really take a big position in, say, ASH when ASH's market cap was only 500 mil.
I'd read Dreman, he talked about the profitability of going against the crowd. I read somewhere on the internet that small caps outperform over time, and this is particularily true coming out of a bear market.
But anyway, after alot of thought here are a host of reasons why anybody can beat the pros:
1. you can buy small cap stocks, you can buy microcap stocks, and you can buy nano cap stocks. you can buy 10's of thousands of shares of BZ when its market cap is less than 50 million. Big funds can't move money into nano cap stocks at all, no significant amount of money at all.
2. you can buy stocks under $5 or even under $1. A huge amount of the money i've made has been buying shares of companies under $5. GNW, CNO, BZ, XL, ACAS, MCGC, ALD, ARCC, AINV, BAC, HIG and more dipped under $5. Most of those names I only bought under $5, many I bought under $1. The deepest value plays are often "penny stocks".
3. you can actually make sense, you don't have to follow the crowd. "the crwod", by the way, are those pros. It was them shorting everything silly that got casinos and insurers and everything else so unbelievably low. Can't short and buy at the same time, can you? Hence, literally, the pros (en masse) are compelled to follow the crowd because THEY ARE THE CROWD. Any given pro may go against the grain but this seems to be rare, thats why they call it "the crowd" because it tends to suck everybody in.
4. You can wait. They have to perform quarter to quarter, which results in poor decisions, you can wait. You can hold whatever whenever, you don't ever have to answer to someone why DOW is on your books when its just crashed, you can double down and enjoy the ride up. You have no stigma for having really out of favor names on the books, making it easier to follow the basic principles outlined by Dreman and rendered wildly obvious by history: going against the crowd is what makes money
5. you don't have to listen to analysts. analyst upgrades drive stock prices higher, bigtime, this is a fundamental reason why stocks move higher. Peter Lynch once said the reason most money managers perform so poorly is because "nobody ever got fired for losing their clients money on IBM", meaning that if a stock was in favor with documentation to support that and it went down, they aren't likely to be at risk of losing their job. If they lost money on XL at the bottom... they could be in hot water. This gives individuals an ability to be ahead of the curve. Like ASH for me. I bought a pile of it early in the year. In February one analyst upgraded it but nobody cared. In March another did, it started moving. Then more and more did. Now the pro's like it. NOTHIGN AND I MEAN ABSOLUTLEY NOTHING has changed in ASH's situation, but now its $44 and analysts are still upgrading it.
all the money is made by being ahead of the curve, or most of it anyway.
Frankly, I think those 5 reasons are very compelling. Feel free to add more.
The wildly condescending hedgie that told me I was going to lose all my money, this wasn't a question, this was a fact, all of it (how stupid is that statement, really?) and probably soon... is up 17% this year. The markets up what? 15%? I'm up 17% + 15% + 200% + a decent dividend.
I didn't get any insider information. I didn't front-run any stocks, I didn't naked short anything or naked long or write an article anywhere to pump or pound any stocks. I just played the odds as I understood them.
1. buying whats most out of favor makes the most money
2. buying into epic crashes int he market has always paid off in time
3. bear markets always end, and coming out of them small caps perform the most
4. buying stocks that crashed the most in bear markets tends to yield superior returns coming out
5. stocks with cheap valuations outperform. low price/book, low p/e, low price/cash flow, and more
6. one should strive to avoid stocks likely to go bankrupt
and I made one really good call (each link is different).
I just played by history and followed the rules it teaches. Even without that one really good call the returns would have been epic and far far greater than any of thecocky condescending hedgies that badgered us endlessly earlier in the year.
I win, they don't, and frnakly I think if you follow the basic rules history so kindly outlines, any of us can beat the market and beat the pros.
but, just follow the rules history outlines, and you probably don't need alot of luck