Who has the advantage, individuals or pros?

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Random Walker
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Who has the advantage, individuals or pros?

Post by Random Walker » Sun Jul 22, 2012 9:31 pm

I was reading the WSJ this weekend and I read the following quote from Byron Wien (he's famous but Ive never heard of him :)): " I think the public feels that professionals have taken over the market and the playing field isn't even for them.". I think this brings up some important issues for individual investors. Individual investors do have some advantages over the pros, and it is critical that we take advantage of them to succeed.
I remember from Charles Ellis' Winning The Losers Game that about 90% of the trading of equities is between big, powerful, informed, smart, computerized, etc wall street firms. If one side's big computer is selling and the other side's big computer is buying, I think it's pretty fair to assume the price is pretty much on the mark. And that is good news for us. Whereas huge firms are pressured to beat benchmarks every quarter and frequently take too much risk, hold too much cash, or become high priced closet indexers, we can patiently buy, hold, rebalance, tax lost harvest, and adjust our asset allocation somewhat opportunistically as we age through the life cycle of investing.
If the pros have an advantage over us, we benefit from passively riding along as they compete with one another. If we do this in a cost efficient manner and tailor to our personal circumstances, then we have an advantage. Curious to hear what others think of the "big guys advantage".

Dave

Anon1234
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Re: Who has the advantage, individuals or pros?

Post by Anon1234 » Sun Jul 22, 2012 10:58 pm

The advantage the big guys have is the bernanke put and use of FDIC-insured, borrowed money for trading. Nobody will bail me out if I go bust.

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Re: Who has the advantage, individuals or pros?

Post by Stryker » Mon Jul 23, 2012 9:23 am

Charles Ellis said it near a decade ago:

Q. Why index funds?

A. Watch a pro football game, and it's obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, "I don't want to play against those guys!" Well, 90% of stock market volume is done by institutions, and half of that is done by the world's 50 largest investment firms, deeply committed, vastly well prepared--the smartest sons of bitches in the world working their tails off all day long. You know what? I don't want to play against those guys either.

But I don't have to play against them. Instead, I can hire them--by buying an index fund. Then they all work for me for free, because stock prices express the best judgment of all the investors out there. Most of the time, those prices are approximately right, so most of the time you'll be wrong if you second-guess them. Factor in fees and trading costs--not to mention taxes--and you have to do about 20% better than average before your costs just to match the index after your costs. Stock picking is a loser's game, but Wall Street loves creating the perception that you can win at it.

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Prokofiev
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Re: Who has the advantage, individuals or pros?

Post by Prokofiev » Mon Jul 23, 2012 10:00 am

Stryker wrote:Charles Ellis said it near a decade ago:

Well, 90% of stock market volume is done by institutions, and half of that is done by the world's 50 largest investment firms, deeply committed, vastly well prepared--the smartest sons of bitches in the world working their tails off all day long. You know what? I don't want to play against those guys either.
But if one believes in EMH, what good does having a "vastly well prepared" staff of analysts and technicians do for you? As long as there are a few 1000 of "the smartest sons of bitches in the world working their tails off all day long" and competing with one another, aren't prices efficient? When large institutions trade, there is a "deeply committed" analyst on each side, one who thinks the position should be sold, the other calculating in should be bought. Are they both right?

We see this argument here often: "Don't trade against the Big Boys. They are so much smarter than you. Why compete?"

But also; " Don't listen to the Big Boys. They know nothing that you don't. EMH rules and their recommendations and technical analysis are completely worthless."
Last edited by Prokofiev on Mon Jul 23, 2012 3:40 pm, edited 1 time in total.
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Re: Who has the advantage, individuals or pros?

Post by richard » Mon Jul 23, 2012 10:09 am

Prokofiev wrote: We see this argument here often: "Don't trade against the Big Boys. They are so much smarter than you. Why compete?"

But also; " Don't listen to the Big Boys. They know nothing that you don't. EMH rules and their recomenndations and technical analysis are completely worthless."
There are two classes of Big Boys - those that are essentially trading for themselves and those who are advising or managing for investors. Some of those essentially trading for themselves might actually be skilled and making above market profits. Those who are making recommendations to the public and selling technical analysis are making money from advice, not trading acumen. You shouldn't try to compete with the first group and you shouldn't take advice from the second group.

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Re: Who has the advantage, individuals or pros?

Post by chaz » Mon Jul 23, 2012 10:13 am

I like what Charles Ellis said.
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FabLab
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Re: Who has the advantage, individuals or pros?

Post by FabLab » Mon Jul 23, 2012 10:15 am

chaz wrote:I like what Charles Ellis said.
Could not agree more.
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Random Musings
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Re: Who has the advantage, individuals or pros?

Post by Random Musings » Mon Jul 23, 2012 10:54 am

The pro's, as mentioned above, [OT comments remove by admin LadyGeek]

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Re: Who has the advantage, individuals or pros?

Post by yobria » Mon Jul 23, 2012 11:07 am

Prokofiev wrote:But if one believes in EMH, what good does having a "vastly well prepared" staff of analysts and technicians do for you? As long as there are a few 1000 of "the smartest sons of bitches in the world working their tails off all day long" and competing with one another, aren't prices efficient? When large institutions trade, there is a "deeply committed" analyst on each side, one who thinks the position should be sold, the other calculating in should be bought. Are they both right?
At the highest levels, prices aren't efficient, and there are returns to analysis. If you're the hedge fund with the most insider connections, or the best models, you have an edge. Two models may come up with different prices, so you have a buyer and seller; one will turn out to have been "right", could be due to skill, could be due to luck.

As an individual investor, we only care if we can consistently beat these folks at their game. I don't think I can, so I index. The market doesn't have to be perfectly efficient, just efficient enough that I can't beat it.

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Re: Who has the advantage, individuals or pros?

Post by staythecourse » Mon Jul 23, 2012 11:12 am

I will tell you that individuals do have some definite advantages that pension funds and endowment funds don't have. We invest for our time horizon, but the others have no choice, but to invest for short term payouts AND long term growth. That is a HUGE advantage for the little guy.

That is the reason pension funds and endowments are 60/40. It allows a good combination of current payouts and long term growth.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: Who has the advantage, individuals or pros?

Post by jack1719 » Mon Jul 23, 2012 2:31 pm

staythecourse wrote:I will tell you that individuals do have some definite advantages that pension funds and endowment funds don't have. We invest for our time horizon, but the others have no choice, but to invest for short term payouts AND long term growth. That is a HUGE advantage for the little guy.

That is the reason pension funds and endowments are 60/40. It allows a good combination of current payouts and long term growth.

Good luck.

The problem is Individuals dont look "long term"..they bail when things get bad..then dont time getting back in at right time..Penions and endowments are always looking long term,they stay invested..it certainly has paid off that that startegy..as long term pension and endowments have done very well

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Re: Who has the advantage, individuals or pros?

Post by Stryker » Mon Jul 23, 2012 2:42 pm

Yabbut, I'm just finishing reading about U.S. endowments called "Outperform", and their asset classes except for bonds went down, the same as for amateur investors during the financial crisis of 2008-09. Here they had intelligent experts on staff who were supposed to protect tail risk in the portfolios. I don't have as much envy of their capabilities as I once did.

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Re: Who has the advantage, individuals or pros?

Post by stratton » Mon Jul 23, 2012 3:28 pm

One of the advantages indvidual investors have is FDIC CDs and iBonds. There are probably others, but I can't remember them right now.

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staythecourse
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Re: Who has the advantage, individuals or pros?

Post by staythecourse » Mon Jul 23, 2012 3:38 pm

jack1719 wrote:
staythecourse wrote:I will tell you that individuals do have some definite advantages that pension funds and endowment funds don't have. We invest for our time horizon, but the others have no choice, but to invest for short term payouts AND long term growth. That is a HUGE advantage for the little guy.

That is the reason pension funds and endowments are 60/40. It allows a good combination of current payouts and long term growth.

Good luck.

The problem is Individuals dont look "long term"..they bail when things get bad..then dont time getting back in at right time..Penions and endowments are always looking long term,they stay invested..it certainly has paid off that that startegy..as long term pension and endowments have done very well
I would agree with that, but that doesn't make it any less of an advantage. I would say that just makes it a wasted advantage.

Trust me if you think investing is hard just think about trying to invest for the long term AND think about making up your current income to meet liabilities through just investment income. Some folks will try to use the analogy of retirees, but that would not be correct as their major liabilities are decreased. Often no mortgage, less taxes, no kids education, etc...

For example, folks wonder why Swensen has so much in real estate. The answer is it is a continuous stream of income each month to pay for the current liabilities at Yale while equities do the job long term.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Bustoff
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Re: Who has the advantage, individuals or pros?

Post by Bustoff » Tue Nov 10, 2015 7:15 am

Here is a recent Barry Ritholtz article addressing the OP. (Didn't want to start a new thread so posting here.)

How you, the amateur investor, can beat the pros

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Epsilon Delta
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Re: Who has the advantage, individuals or pros?

Post by Epsilon Delta » Tue Nov 10, 2015 11:35 am

Prokofiev wrote: But if one believes in EMH, what good does having a "vastly well prepared" staff of analysts and technicians do for you?
The EMH is best viewed as a limit rather than an absolute. Prices will get close to the ideal but will never actually get there. However they get close enough that the difference is very hard to exploit.

Another way to view this is that the mechanism behind the EMH is arbitrage, investors sell what is over priced and buy what is under priced and this moves the prices towards the efficient price. This means that the prices are fuzzy at scale of transaction costs, the bid and ask prices will never be the same. Prices are less fuzzy to the people with the lowest transaction costs*, and these are the people who set the market price.


* The transaction costs include the cost of identifying any prices that can be exploited and that's where the vastly well prepared staff comes in.

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Re: Who has the advantage, individuals or pros?

Post by IlliniDave » Wed Nov 11, 2015 5:20 am

Maybe I'm misunderstanding what "professionals" do, but I understand that typically they make a lot of money while putting other people's money at risk. There's basically no downside in that other than if you screw up really bad the gravy train might hit the end of the track. Individuals bear the risk of losing their own money.
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Re: Who has the advantage, individuals or pros?

Post by afan » Wed Nov 11, 2015 5:19 pm

Exactly. The pros have a huge advantage over the amateurs.

The beauty of being a pro is that you get paid for investing other people's money. Even if you are doing proprietary trading for a wirehouse, it is their money, not yours, at risk. You get a salary that is small by the mad standards of Wall Street, but still huge. If you beat the market (i.e. get lucky in your choice of undiversified investments) then you get a huge bonus. If you do not lose too much, you get a smaller bonus.

No one is paying me a salary or bonus for gambling on being lucky. I could hit a goo streak and do well, but there is no force multiplier of OPM and by my choice, no leverage.
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Re: Who has the advantage, individuals or pros?

Post by nedsaid » Wed Nov 11, 2015 5:24 pm

Bustoff wrote:Here is a recent Barry Ritholtz article addressing the OP. (Didn't want to start a new thread so posting here.)

How you, the amateur investor, can beat the pros
This is an excellent article. As an individual small investor, I don't have anyone to answer to but myself. I just buy what I like and keep an eye on results. I certainly do look at the benchmarks and see how I am doing. So far so good.
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patrick013
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Re: Who has the advantage, individuals or pros?

Post by patrick013 » Wed Nov 11, 2015 5:36 pm

It's funny. They claim there's a computerized algorithm
that can auto trade the market for reliable gains. Auto-
trades actually did based on certain market factors. But,
then back to the same old thing. Some short term trading
tricks with the computer do exist I believe.

I bought a company once and the next day it took out a billion
dollar loan unannounced for an acquisition. Return since then
negative.

MLP's taking a down beating so I bought an infrastructure REIT, well
that's up 8% then.

I like buying companies I like but just a hundred shares or so. Let them
index funds do the general investing.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Who has the advantage, individuals or pros?

Post by boglerdude » Thu Nov 12, 2015 2:51 am

"90% of stock market volume is done by institutions, and half of that is done by the world's 50 largest investment firms, deeply committed, vastly well prepared--the smartest sons of bitches in the world working their tails off all day long."

Has there been a change in investor demographics, or was it these institutions that bid up tech stock prices to such high levels in the late 90s?

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JoMoney
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Re: Who has the advantage, individuals or pros?

Post by JoMoney » Thu Nov 12, 2015 5:49 am

The people with the best information and best position have an advantage.
I don't have any information that's not available to everyone else, and I'm not willing to put the time and effort or have the connections to do the type of first-hand "scuttlebutt" research that Philip Fisher talked about. I'm probably more likely to fall prey to mis-information or incomplete information being put out by those on the sell side of the market. Most businesses are way outside the realm of anything I have any experience with, and at best I could only hazard a guess at what sorts of challenges most business might face... and at the same time I wouldn't want the risks of concentrating only in narrow areas where I thought I might have some understanding of the nuances.
I also don't have access to co-located servers or high-speed fiber optic cables giving me any sort of execution speed advantage, or any kind of position to play 'market maker' or broker.
I'm convinced there are people out there that can make money trading and stock picking, but it's not me.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Who has the advantage, individuals or pros?

Post by sawhorse » Thu Nov 12, 2015 10:50 pm

What gives an investor an advantage?

Insider information. With investing, knowledge is power. Speed is power. If you know something sooner than other investors, the short term direction of the stock is no longer a guessing game. No doubt this goes on a lot more than is regulated.

Insider information is usually an individual advantage or at most a small group of individuals at an institution. It's difficult for a large group of people at an institution to prevent the news from getting out; someone will blab. If all else were equal (usually not the case), those with lower assets and wealth have an advantage because the SEC is more likely to investigate insider trading when it involves a lot of money. A janitor who spots a confidential incriminating document that fell behind the shredder has a greater advantage than Goldman Sachs. Warren Buffet's doctor has an advantage. People at hospitals conducting clinical tests for a drug going up for FDA approval have an advantage. Sometimes the clinical test patients even have an advantage despite the fact that they're not supposed to know what companies are involved.

Ability to influence a company's outcomes. A company's outcomes can be manipulated in many ways. Regulations, legislation, investigations, legal decisions, publicity, widespread rumors.

This is probably slightly more common as an institutional advantage. If you have the power to have a regulation enforced or a new legislation passed or an investigation started, you have the ability to make it a lot easier or a lot more difficult for a company to report favorable numbers. Read the 2014 New York Times article about the Pershing hedge fund and Herbalife if you have any doubt.

Journalists and bloggers can have a lot of influence too. Look at what the Wall Street Journal article did to Theranos. Or the degree to which well-followed blogs can convince people to buy or avoid a product. And of course there's Oprah.

Ability to influence a company's operations. Board seats, shareholder votes.

With the exception of the extremely wealthy, this is an institutional advantage. For example, Vanguard is the largest holder of some stocks and has enormous power in shareholder votes.

Ability to influence supply and demand.

Usually an institutional advantage but can be both. When a wealthy major shareholder, whether an individual or institution, sells a large chunk of stock, the stock price inevitably goes down. Pump and dump schemes are based on the ability to influence supply and demand. They usually involve a small institution of just a few individuals; think of Stratton Oakmont. Often times that small institution is the company itself. That's why pump and dump schemes are most common with penny stocks.

Another way to influence supply and demand is to grant patents, restrict production, saturate the market. OPEC. The FDA. Legislators.

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Re: Who has the advantage, individuals or pros?

Post by dreamxite » Sun Nov 22, 2015 9:25 pm

Obviously it is the investors.

1. Time horizon
The pros are mostly bench huggers, why? Their performance are being measured every minute, in order not to fallen behind, they dont really care about outperforming others. Their incentive is to keep their job. On the other hand, individual has 20-30 years to play a game, individual doesnt have to report to anyone, they can endure a short period of underperformance while waiting for the fat pitch.

2. Size
Most pros managed billions of assets under management. That means they cannot own small cap or microcap companies, that is when value/price gap are the widest. As an individual you can buy what they can't and small/microcap are the places that deliver the highest upside.

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JoMoney
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Re: Who has the advantage, individuals or pros?

Post by JoMoney » Mon Nov 23, 2015 2:27 am

dreamxite wrote:...Most pros managed billions of assets under management. That means they cannot own small cap or microcap companies, that is when value/price gap are the widest. As an individual you can buy what they can't and small/microcap are the places that deliver the highest upside.
They're not prevented from owning small/micro-cap stocks, there are many institutional investors heavily invested in small/micro-caps, but the amount of money they have to invest limits how much of their portfolio they would be able to concentrate in any particular company... which could theoretically make the competition for stock picking within those segments easier, but still a zero-sum game trying to outperform the broad market of small/micro-cap stocks.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Who has the advantage, individuals or pros?

Post by noyopacific » Mon Nov 23, 2015 3:00 am

During the pre-season the pros have the advantage.
They can generate operating revenue whether or not they play well in the second half.

During the playoffs the individuals have a better chance.
When total returns are counted, we don't need to carry the burden of fees the pros have to drag around.
The information contained herein, while not guaranteed by us, has been obtained from from sources which have not in the past proved particularly reliable.

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Maynard F. Speer
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Re: Who has the advantage, individuals or pros?

Post by Maynard F. Speer » Mon Nov 23, 2015 6:40 am

If the benchmark is beating the average, small retail investors are at a huge advantage (assuming they know what their advantages are)

- For a stock-picker, you can make much larger profits off tiny, undervalued businesses, that would clog up and only provide rounding error returns to a hedge fund (there are new options for small investors now too, such as equity crowd-funding);
- You can buy the best bond issues (and not have to put the other $1bn in 2nd, 3rd and 4th best);
- You've got a much longer time-horizon than most of the market .. So you can invest in things on massive discounts, and not lose your job if they don't contribute to a top quartile return over the year;
- You can invest in things retail funds aren't necessarily allowed to invest in, such as P2P lending (7-20% returns many institutional investors would kill for in these markets);
- You can trade in tax-sheltered accounts, and use platforms that waive dealing fees;
- You can move your entire portfolio to cash in an afternoon

Pros have the advantage of information and resources, but there are so many operating constraints

Buffett on the same point:

“..it's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

http://buffettfaq.com/#according-to-a-b ... ifferently
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Re: Who has the advantage, individuals or pros?

Post by dreamxite » Tue Nov 24, 2015 12:49 am

JoMoney wrote:
dreamxite wrote:...Most pros managed billions of assets under management. That means they cannot own small cap or microcap companies, that is when value/price gap are the widest. As an individual you can buy what they can't and small/microcap are the places that deliver the highest upside.
They're not prevented from owning small/micro-cap stocks, there are many institutional investors heavily invested in small/micro-caps, but the amount of money they have to invest limits how much of their portfolio they would be able to concentrate in any particular company... which could theoretically make the competition for stock picking within those segments easier, but still a zero-sum game trying to outperform the broad market of small/micro-cap stocks.

I have no idea why people keep saying stock picking is a zero-sum game. I agree trading can be a zero sum game, but investing is the same as owning a business. I own a fraction of the business, my investment grows with the business. My wealth is not dependent on the competition but dependent on the economic of the business itself. We have to get away from looking at things in a statistical way and more on a common sense. You can't be like "oh you want to open a business, let's look at the stats, 90% fail within the next 5 years, standard deviation of 1.5, beta 1.5, no you shouldnt open a business, it is a zero sum game."

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Re: Who has the advantage, individuals or pros?

Post by JoMoney » Tue Nov 24, 2015 2:29 am

dreamxite wrote:
JoMoney wrote:
dreamxite wrote:...Most pros managed billions of assets under management. That means they cannot own small cap or microcap companies, that is when value/price gap are the widest. As an individual you can buy what they can't and small/microcap are the places that deliver the highest upside.
They're not prevented from owning small/micro-cap stocks, there are many institutional investors heavily invested in small/micro-caps, but the amount of money they have to invest limits how much of their portfolio they would be able to concentrate in any particular company... which could theoretically make the competition for stock picking within those segments easier, but still a zero-sum game trying to outperform the broad market of small/micro-cap stocks.

I have no idea why people keep saying stock picking is a zero-sum game. I agree trading can be a zero sum game, but investing is the same as owning a business. I own a fraction of the business, my investment grows with the business. My wealth is not dependent on the competition but dependent on the economic of the business itself. We have to get away from looking at things in a statistical way and more on a common sense. You can't be like "oh you want to open a business, let's look at the stats, 90% fail within the next 5 years, standard deviation of 1.5, beta 1.5, no you shouldnt open a business, it is a zero sum game."
The zero sum aspect is only with regard to somehow garnering 'excess returns'. The entire market of small/micro-cap stocks as a whole will only grow a certain amount over a period of time. If there is some portfolio within that segment that returns more than the group as a whole, there must be another portfolio returning less. There's no other way around it.
I'm not going to say that people can't select stocks better than the aggregate of whatever market segment you want to define as the scope being selected from, but I believe that it's a highly competitive game that's considerably more difficult then some people want to believe.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Who has the advantage, individuals or pros?

Post by dreamxite » Tue Nov 24, 2015 2:45 am

JoMoney wrote:
dreamxite wrote:
JoMoney wrote:
dreamxite wrote:...Most pros managed billions of assets under management. That means they cannot own small cap or microcap companies, that is when value/price gap are the widest. As an individual you can buy what they can't and small/microcap are the places that deliver the highest upside.
They're not prevented from owning small/micro-cap stocks, there are many institutional investors heavily invested in small/micro-caps, but the amount of money they have to invest limits how much of their portfolio they would be able to concentrate in any particular company... which could theoretically make the competition for stock picking within those segments easier, but still a zero-sum game trying to outperform the broad market of small/micro-cap stocks.

I have no idea why people keep saying stock picking is a zero-sum game. I agree trading can be a zero sum game, but investing is the same as owning a business. I own a fraction of the business, my investment grows with the business. My wealth is not dependent on the competition but dependent on the economic of the business itself. We have to get away from looking at things in a statistical way and more on a common sense. You can't be like "oh you want to open a business, let's look at the stats, 90% fail within the next 5 years, standard deviation of 1.5, beta 1.5, no you shouldnt open a business, it is a zero sum game."
The zero sum aspect is only with regard to somehow garnering 'excess returns'. The entire market of small/micro-cap stocks as a whole will only grow a certain amount over a period of time. If there is some portfolio within that segment that returns more than the group as a whole, there must be another portfolio returning less. There's no other way around it.
I'm not going to say that people can't select stocks better than the aggregate of whatever market segment you want to define as the scope being selected from, but I believe that it's a highly competitive game that's considerably more difficult then some people want to believe.
Yea absolutely i would agree it is very competitive. oh well, im 3 years into stock picking, if I failed to beat the benchmark over 5, 10 years period, it would make sense to index.

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