One of my favorite investment/trading writers on the internet is James “Rev Shark” DePorre. He writes for RealMoney.com. I can’t link you to it because it’s a paid-subscription Web site. But here’s what he wrote this morning:
In response to another post, he wrote:
Bob, I believe that in most cases the best approach for hedge fund managers like you is quite different than the best approach for individual investors. I write the trading diary from the perspective of the individual trader who is running a small amount of capital and capable of becoming fully invested very quickly. I believe it is unproductive for them to worry about market timing to the degree that someone who is managing $100 million might. Small individuals have a big advantage and they squander it when they try to be masters of market timing.
In my experience individual investors that are trying to copy institutional investors have a tendency to average down too fast and too aggressively in a poor market. In most cases they would be far better off to wait for the market to uptick or trend upward rather than buying weakness.
And then later on he gave a more complete response:
I posted some comments in response to Bob Marcin in Columnist Conversation about the differences between small individual investors and large institutional investors that I want to expand on a bit. I believe one of the major failings of stock market journalism is that almost no one seems to appreciate that difference.
In most cases, the attitude is what is a good investment style for a giant fund is equally good for individual investors. The end result is that we end up with investors who believe they can outperform giant mutual funds by simply mimicking what they do, but without the advantages of access to management, reams of research and huge amounts of capital.
It really isn’t surprising that the media has such a strong bias toward an institutional style of investing. Most of the folks we see on television who offer advice are institutional money managers. Many, if not most, have never been involved in just managing their own small personal investment stake. They simply don’t understand the different strengths and weakness that individual investors possess.
One of the best examples of an institutional mindset is the bias toward averaging down and disregarding chart patterns. Big funds tend to buy weakness and ignore chart patterns because they have little choice in the matter. They can’t stop out of a position that breaks a technical level because they would never get a decent fill. Instead, they are forced to comfort themselves with fundamentals and use the lower prices to reduce their cost basis.
If ignoring charts and buying weakness is how you approach the market, and you have had some success, you are going to recommend that others do the same thing even if they are in very different circumstances. If you really think about the strengths and weaknesses of an small individual investor, you would likely make some modifications to the way you approach the market. If you recognize that someone can easily enter and exit stocks with no price slippage, wouldn’t you take that into account?
As you consider investment advice, make sure you understand the perspective of the people who are offering it. The vast majority have good intentions, but they are seeing things through the prism of their personal experience. In many cases, that means their advice is better suited for big funds rather than small individual investors.
Indeed. Individual investors have a huge advantage over institutional investors and most of them don’t even realize it.
