Wednesday, May 18, 2011
Beating The Pro's.
People have been so brainwashed by the marketing efforts of the financial services industry that they cannot accept the idea the little guy has any hope of competing with professional fund managers. They refuse to believe the assertions of people like myself when we say it is more than possible. So I wonder what they say to Gary Kaminsky, possibly one of the best money managers in recent history. In his recent book, "Smarter Than The Street", he writes about a number of myths. The ninth myth involves the idea that individual investors can't beat the pro's.
Beating The Street
Kaminsky talks about the herd mentality adopted by many managers making them little more than "closet indexers". He also talks about retail investors not having to focus on how to beat a particular index, or get more and more people to put their money into their fund. He also discusses the benefits of being an independent investor rather than one having to answer to multiple constituencies.
The key advantage, he says, is how much more nimble the individual investor can be compared to the institutional money manager. Unless you are already independently wealthy, your portfolio is probably small enough that you can allocate ten, or twenty percent of it by purchasing thousands of shares, compared to the millions of shares needed in the case of major fund managers. Instead of unwinding positions in a matter of a day, or so, portfolio managers can take weeks.
Following The Footprints
Learning that is what attracted me to technical analysis in the first place. Except for the use of so called "Dark Pools", there is no possible way for fund managers, especially those engaged in herd-like behaviours, to hide their trades so they don't affect chart trends and patterns. After all, it is the institutional managers that make the markets, not the retail investor. By identifying the trend, the individual investor can jump on it as soon as they spot it. Not only that, they can exit the trade just as quickly.
The Usual Suspects
We all know the reasons why jumping in and out of the market doesn't work. They include too much overhead in commissions, tax costs that are too high, churning of accounts which compounds the errors the non-professionals are prone to. Are you kidding me? There is only one reason we are supposed to believe that trading our own accounts will not work, and that is because the professionals want us to believe we have to give them our money, or risk wasting it ourselves.
Capital Is King
A couple of my own rules include never, ever, lose money trying to avoid the cost of a commission charge. Another is, while you can defer taxes, you can't avoid them. Yes, there can be better times than others to take some tax losses, but if we are saving a couple of tax dollars at the expense of the capital in our portfolio, what are we gaining?
Given the fact that a successful money manager like Kaminsky thinks that one of the greatest advantages of retail investors is being nimble, it always amazes me how many people refuse to even try to take advantage of it. Instead, people buy all of the misinformation and marketing ploys put out by the financial services industry and don't even try. Perhaps it is just as well. If people can't see past the marketing machines designed to brainwash them into handing over their life savings, what possible chance do they stand against the sell-side analysts and talking heads in the media who are hyping stock picks out of their own self interest? People like that are probably better off spending their time doing other things.
How do you feel? Can the little guy beat the "experts"?