Wall Street: where midgets are giants
I shall endeavor, in these last minutes of my day, to offer why I honestly think that individual investors have a big advantage over big-money in this game. I honestly mean that. There are so many reasons. But before I get into that, I just want to acknowledge that probably almost all of the things small investors complain about with respect to wall street are true, and more. We do have some significant disadvantages here, without a doubt. Its just that our advantages outweigh those and much more.
Look, big money has alot going for it. They get a chance to buy every IPO, to buy behind-the-scenes semi-IPOs like Facebooks recent deal, they get to buy under the market secondaries, and they get a chance to other stuff we simply can't, and more. You and I don't get to do these things.
They get inside information. If you don't think that happens, and if you think that Raj Razajajasmartaparian was the only guy who got it, you're smoking really good drugs. They all get it, be serious. I bet it happens so often that its just a part of life. Me? I've had a hard time several times just getting investor relations on the phone, or to reply to an email. When they answer, they often just tell me to go read the 10Q.
They have research staff, and this is their job. We often have jobs, we have families, friends, hobbies, pubs to go to, and when we do those things nothing is getting done about our investments. They can tell people to sit and read a 10Q and report on X, Y, and Q in the morning.
We get screwed all the time by the machines. Probably every trade we make we lose a couple cents per share or something to somebodies program somewhere. They can front run stocks, have their own analysts help them buy or unload positions, all of that and much more. They almost certainly hire people to scare people and stuff, via message boards, blogs and all of that.
And more. This wasn't meant to be a tome or even a competent commentary on the advantages that big money has, it was just meant to acknowledge that they have some really big ones. You can insert wild zero hedge conspiracy theories or whatever you want, some of it is true at a minimum.
But we still have the advantage, in so many ways. Lets make a list:
1. Less pressure: We don't have to perform every month and quarter. Think about this one: imagine you have 2 strategies, all plotted out and calculated, upon which you started hedge funds. One returns say 30% per year but drops 2x as much as the market when the market gets ugly. So you're down 15% in the recent downturn, 30-40% last summer. The other returns 20% per year, but at worst loses a few percent some months. Clients of your first fund call during a scary time, like last May, and ask how you're doing, you say "down 40%, but don't worry we're going to make 30% this year". The clients of your second fund call last May and you say "well we're up 1% this month, and 13% on the year, but we don't think that pace will continue and we'll probalby make 20% this year".
Which fund attracts more capital? The second, by 50 times. Pros are under huge performance to not perform over the 18 years of your kid's childhood, not over the 30 years you make enough to save and invest before hopefully retiring, not over a couple of years to keep your spirits up, but over every single quarter if not month.
This is a significant advantage that allows us far greater flexibility in strategy.
2. Less pressure: Pros can be under pressure to not be long the "wrong names". They can be under pressure to be long whatever went up most in the last quarter, so as to look smart in their SEC filings. I have read people talk about this many, many times.
You can own whatever you wish, whenever you wish, you are under pressure to nobody to "look smart".
3. Less pressure: You don't have any pressure to follow analysts. Peter Lynch once quipped that "nobody ever lost his job for losing his clients money in IBM", meaning that if you're running a big mutual fund and buy some stock thats out of favor, you may not be able to explain why you lost all that money if it fails, but if you buy something "approved by the system", you can wash your hands of your failures.
4. Less pressure: you can accept more volatility in your portfolio. This is more ro less a repeat of #1 above, but its so important. More on this later.
5. You are more liquid: you can buy small cap stocks, even microcap stocks. Most of the priveledged big money almost literally can't put any meaningful amount of money into small cap stocks. If you're running $5 billion, honestly, you are somewhat limited. You take a meaningful position in a company with a $300 million market cap or even $1 billion market cap, and you literally have to buy 10% of it AT LEAST for it to matter at all. And in buying that many shares, and subsequently selling that many shares, you run the price up, and then run it down. You're intrinsically penalized in this way immediately and possibly quite significantly if you are big. We're small.
Here's a list of stocks that were honestly just too small in market cap for big money to even be able to really mess with in early March, 2009, just some that come to mind: ASH, ACAS, ALD, MCGC, ARCC, BZ, JOEZ, NCX (its gone, it got bought out at a 300% premium to its price in Feb 2009), HUN, Chemtura, CENX, ATPG, and HUNDREDS more than went up many many times. In fact the great majority of stocks that really roared since those bottoms were simply too small at those bottoms for big money to be able to significantly bother with. Even LVS, HIG, XL, and more were really too small.
We could have piled huge money into CNO, into those ridiculous 50-bagging car rental stocks, whatever. Whatever.
6. You are more liquid: you can hedge better than they can, far more easily. You can do some incredible things that big money can't even think about. Here are some examples:
You can go buy some ASH, say 1000 shares, because you think its going to $300 this year, and then you can buy puts to cover it. 10 contracts could be traded in 3 seconds and you could probably split the bid/ask spread nicely. If you had 100,000 shares, you're sunk. No way you move 1000 put contracts to hedge your bet without murdering yourself on the spread. If you can get that many at all. And you may prompt a marmket maker to short your stock to hedge itself against its short puts, causing yourslef some side-misery.
We can sell calls on FAZ, using the proceeds to pay for puts on XLF. Make the decay intrinsic to FAZ work for us, nowhere near enough liquidity in FAZ calls to even somewhat make that feasible if you're running even a couple hundred million.
You just have more options. to list them would take pages and a week to type. Its my favorite discussion and topic in the market: bizzare uses of all of these fantastic toys they've given us to play with. The pro's can't play with most of them.
7. You ar emore liquid: you can use the options in almost any stock. Forget hedging with options, you can actually USE them. There are literally just a few dozen stocks with enough options liquidity to allow large amounts of money to be moved in them. A small investor can use the options in anything.
8. You are more liquid: you can make strange trades big money simply can't. Forget small caps, and forget options. You can do really smart (>>>>in my view, proceed at your own risk and after thinkingit over yourself, and after a great deal of calculation and spreadsheet making, do not listen to me, I am an idiot and will lose all of my money anyday now, really, never listen to me<<<<) things like, every time the VIX spikes over 30 take 10% of your available margin and short VXX. If it goes over 40, make it 20% of your available margin. The VIX must mean revert, it is an absolute law of nature. VXX will fall from those spikes in the VIX, period. It can go against you, maybe dramatically, but if you simply take this step you will probably honestly add 5 or 10% a year to your returns. Multiply that over a lifetime and the effect is epic. Ditto FAZ (but thats a different sort of animal in alot of ways) or TZA or all of these other broken ETFs that should be shot. Its free money, but there isn't very much of it avaialble, and the pros won't bother with it because it'd never make any difference to them anyway. But it can put your kids through college and buy you a new corvette. Even having what is still a tiny amount of money compared to any notable hedgie to run and I run smack into limits trying to pull these stunts. My brokerage tells me it has no more shares to short, I try to put some puts on VXX and the market just won't take my order. No way anybody with a ton of money to run even looks here. You should, except not because I said so because as disclaimed above I am an idiot.
Also, this can be an incredibly spine tingling experience. It is not for the feint of heart, or anybody who can't deal with waking up one day and having their portfolio down ALOT. Do not do this casually or recklessly, do not do it on such a scale that if things really blow up it destroys you, don't be greedy with it, just treat it as a free, extremely low risk, 5 or 10% a year. Did I ever tell you guys about the times my portfolio has been down double digits in a day? rotflmaololololol. I am not always as conservative as I seem. See #1 and #4 above, if you were under their kind of performance pressure, this would be a HORRIBLE idea for you to try.
But we're not, because we are nobody, and that gives us a huge advantage.
All these marvelous, marvelous toys.
9. You can simply make them work for you, for free. Read their 13Fs. They have to tell you what they are in, and they usually tell you why. Make their research team your research team.
Remember when Bill Ackman (who is an incredibly impressive guy when speaking, by the way) was buying up GGP with a big theory on it? And Bruce Berkowitz was right there, so was Whitney Tilson? Yeah they told you they were doing it, and why, when it was like 55 cents.
I never read a GGP 10Q, I never read a GGP message board, I never read their financials, nothing. And I got my only 40 bagger to date because I just figured "ahh screw it, if all these guys are into it I'll throw a percent in there and see what happens".
Make them work for you. Now you, sort of, have a reserach department hard at work while you're at the movies with your family.
10. You can actually be a contrarian, they ARE the crowd. No further comment
Beyond that, read this book. Then read it again, its just awesome.
At the end of the day, plain and simple, these advantages easily outweigh the advantages that the pros have. BY ALOT. If you have $10k in an account, you're better off from a potential return perspective than if you have $100k.
All these marvelous toys.