Individual investors, possible structural advantages

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psteinx
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Individual investors, possible structural advantages

Post by psteinx » Thu Jan 11, 2018 3:38 pm

TLDR - I propose a list of areas (below) where individual investors may be able to outperform a 3-fund portfolio due to certain structural issues. For those who are interested in, possibly, doing a little bit better than a standard, simple portfolio (at the likely cost of extra time and effort), I hope this post is worth reading and perhaps commenting on.

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There are structural differences in the investment options and strategies available to different classes of investors. These structural differences may be a result of differing tax situations, government/banking regulations, agency issues, liquidity constraints, and/or costs of research time. As a result of these differences, there may be cases where relatively standard BH advice (3 fund portfolio, perhaps with a separate allocation to REITs, a small value tilt, or whatever) may be beaten with an alternate approach tailored to the individual's structural constraints.

This will not necessarily be a comprehensive analysis, nor an exhaustive list. These alternatives may not be great for all individual investors (we each face our own set of structural constraints). But they're areas where, in my opinion, there are solid reasons to think an individual might outperform a base case investment. Also, I have experience with some of these, but not necessarily all. Do your own research please. I encourage commentary and additional suggestions. Warning: for some of these, it may be difficult to get as diversified as one can easily get with large index funds. But the tradeoff may be worthwhile...

1) CDs - direct and/or brokered (possibly on the secondary market). May yield a bit more than similarly safe government bonds. Reasons: a) $250K of FDIC insurance is too little for biggest players. Big players may not want to pick up small secondary market brokered CDs. I'm not an expert in these - I don't think they EXACTLY match the risk profile of treasuries (some issues with interest, if the bank defaults I think), and (state) taxes are likely different, but they may be worthwhile nonetheless.

2) Munis - especially in state, secondary market, tough to analyze stuff. This is less applicable if you're in a state with a very good (i.e. generally Vanguard), state specific muni fund. But for those of us without, we've already got a tailwind from state tax savings. I'm in Missouri - roughly 6% state tax. So, if I find good munis with a 4% yield, I'm saving almost 24 bp in state taxes (I probably would still get a BIT of state tax free stuff in a national muni fund), plus around 9 bp in E.R. on a cheap fund. So that's about 33 bp to offset commissions, spreads, research time, and a somewhat riskier portfolio (less diversified). But I think the real boost is that I can research individual secondary market issues, and find some that I think are particularly attractively priced. A $1B (or $5B) fund doesn't want to spend a lot of time researching the $30K slice of some old unrated issue that just came onto the secondary market. I *can* research this relatively efficiently. It's a potentially deep topic, so I'll stop there for now, but am willing to engage in further discussion.

3) Physical investment real estate - direct ownership. Obviously not as hands off as buying an index fund or a REIT. But I think there are decent possibilities here for the investor with the time and inclination to get hands on. There are also, I think, some possible structural advantages in using a bit of debt for the smaller investor, secured not only by the real estate but also by W-2 income and the like, that are not strictly comparable to what's available to a REIT.

4) Physical real estate - backing other small players. I think, once in a while, we see folks on BH claim success by hard money lending and/or going in on real estate deals with trusted partners. Should be less hands on than #3, but more hands on than a REIT or fund.

5) Closed end funds, at least sometimes. Yes, even big investors *could* invest in closed ends, but there are some reasons why they rarely do, including liquidity. I think the opportunities here are stronger at certain times than others - there's are some liquidity issues when the market (or a portion of it) panics.

6) Illiquid investments generally. In the 2008-9 market environment, in my opinion, some large players were, net sellers, and there was insufficient liquidity to soak up the selling, resulting in large, actionable price disruptions. Again, a deep topic, I won't dive too far into it now, but I think that an eyes-open investor with some ability to reallocate across asset classes will sometimes see some good opportunities that aren't fully arbitraged away by the efficient market/large investors.

7) Microcaps/nano caps. Low liquidity, lots of analysis required to understand. Probably not attractive on average, but within the broad space, I suspect appealing opportunities can be found, sometimes. Structural issue keeping big plays out are liquidity, information, research costs, market cap/depth.

8) Angel investing. Another area where I suspect the average return is not so hot, but a really savvy investor could outperform.

9) Individual stocks, emulating a passive index. Rather than buying TSM or an S&P 500 index fund, an investor could roll their own portfolio with a variety of individual stocks (hopefully diversified). Advantage? Better ability to tax harvest losers, and hold on to, or perhaps donate, big winners. i.e. Potentially better tax-wise...
Last edited by psteinx on Thu Nov 14, 2019 6:41 pm, edited 2 times in total.

asif408
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Re: Individual investors, possible structural advantages

Post by asif408 » Thu Jan 11, 2018 4:12 pm

Another structural advantage is no boss or management looking over your shoulder who will fire you if you underperform over a year or two, like many institutions might. So if you have a long-term strategy than may take 5 or 10 years to pay off you are more likely to be able to implement successfully as an individual.

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Re: Individual investors, possible structural advantages

Post by OkieIndexer » Thu Jan 11, 2018 4:31 pm

psteinx wrote:
Thu Jan 11, 2018 3:38 pm
1) CDs - direct and/or brokered (possibly on the secondary market). May yield a bit more than similarly safe government bonds. Reasons: a) $250K of FDIC insurance is too little for biggest players. Big players may not want to pick up small secondary market brokered CDs. I'm not an expert in these - I don't think they EXACTLY match the risk profile of treasuries (some issues with interest, if the bank defaults I think), and (state) taxes are likely different, but they may be worthwhile nonetheless.

3) Physical investment real estate - direct ownership. Obviously not as hands off as buying an index fund or a REIT. But I think there are decent possibilities here for the investor with the time and inclination to get hands on. There are also, I think, some possible structural advantages in using a bit of debt for the smaller investor, secured not only by the real estate but also by W-2 income and the like, that are not strictly comparable to what's available to a REIT.
Yes, physical real estate or land that you own, especially if it has a pretty reliable income stream like rental property, is a true alternative investment. Rental property can even have higher returns than the stock market in some scenarios.

My Depression-era grandmother (born in 1914) bought a bunch of double-digit % long-term (probably 5 year) CDs in the early 80s, and that combined with her rental property was all she needed to fund retirement (plus Social Security/Medicare). She did great, and she would have done great even if the high inflation/bad stock market 70s had continued into the 80s and 90s.
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Re: Individual investors, possible structural advantages

Post by Ethelred » Thu Jan 11, 2018 4:54 pm

psteinx wrote:
Thu Jan 11, 2018 3:38 pm
TLDR - I propose a list of areas (below) where individual investors may be able to outperform a 3-fund portfolio due to certain structural issues. For those who are interested in, possibly, doing a little bit better than a standard, simple portfolio (at the likely cost of extra time and effort), I hope this post is worth reading and perhaps commenting on.
I think it's an interesting list, and I agree that CDs represent an investing advantage for individual investors. I'm afraid I struggle to see how any of your other items can represent an advantage to an individual investor, though.

An individual investor and an amateur (with a day job) will generally be at a disadvantage when it comes to knowledge or time availability, in comparison to the economies of scale and the possibility to develop deep expertise available to institutions. That would seem to exclude your items 2, 3, 4, 7 and 8. Some individuals should be able to find opportunities, by virtue of their occupation or social network, but for many of them there will still be a big risk that they don't know as much as they think they do.

Items 5 and 6. While I personally think illiquid investments are under-used by individual investors, since most won't take money from their retirement accounts for decades, pension funds and some other institutional investors have even longer investment time-frames.

Item 9. This is obviously an advantage for institutions. The ERs of index mutual funds exist because they allow individual investors to take advantage of "economies of scale". Institutions either don't need to do this because they already have economies of scale and can conveniently hold lots of individual stocks, or they can use institutional mutual funds that have lower ERs.

Now, I think some limited advantages for individual investors do exist, either through the advantages only being available for smaller amounts, or through the different legal position of individual and institutional investors. An example of the former would be CD insurance through FDIC. An example of latter would be the capital gains home sales exclusion.

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psteinx
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Re: Individual investors, possible structural advantages

Post by psteinx » Thu Jan 11, 2018 5:08 pm

Not to dive too deep, but to expand a little on #2 (munis) and #9 (individual stocks).

Munis: There's already a tailwind for an individual, in certain states, because they avoid even the cheap (but non-zero) ER of a Vanguard national muni fund, and they can buy issues for their specific state (saving state taxes to a degree generally not possible with a national muni fund). I think there can be a further advantage in that an individual may value their research time at $50/hour or $20/hour or even $0 (if they kinda like this sort of thing), whereas a national fund would generally be valuing analyst time at a MUCH higher rate, and thus avoiding certain bonds (especially secondary issues), where research costs would swamp likely excess returns. (i.e. You might have to research 4 bonds to find 1 that's worth buying.)

Individual stocks: The ER savings here is likely smaller (and perhaps offset by other efficiencies of a fund, plus securities lending), but there's a (potential) structural advantage in having winners and losers more dispersed than they would be in a fund. Imagine a simplified investing universe of 2 stocks, A and B, and one fund F, that invests in those 2 stocks (equal weight). If, some time later, A is up 20% and B is down 20%, then the fund (F) should be flat. The investor who holds F cannot realize a capital loss, nor can he take advantage of the opportunity to appreciate donated shares. But the investor who holds A and B could sell B (realizing a capital loss), and/or donate some A to charity (donating appreciated shares can be more attractive, for tax reasons, than donating cash).

This is a structural thing. You generally have more tax flexibility in disposing of component individual stocks than you would in disposing of shares of a fund that otherwise held those stocks in the same proportions.
Last edited by psteinx on Thu Jan 11, 2018 5:14 pm, edited 1 time in total.

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Re: Individual investors, possible structural advantages

Post by willthrill81 » Thu Jan 11, 2018 5:14 pm

asif408 wrote:
Thu Jan 11, 2018 4:12 pm
Another structural advantage is no boss or management looking over your shoulder who will fire you if you underperform over a year or two, like many institutions might. So if you have a long-term strategy than may take 5 or 10 years to pay off you are more likely to be able to implement successfully as an individual.
+1

Honestly, I think that's part of the reason that we don't see active management beat passive more often than we do. Any strategy, including tilts toward anything, will underperform the broad market at some point, and it could go on for years. Investors have repeatedly shown themselves to be impatient with any strategy that lags behind the market for more than a year or two. That's why closet indexing is so rampant among active managers; they are assured that their performance won't be too different from the market's in any given year.
The overwhelming majority of top mutual fund managers — those who had the best record over a decade — spent at least three years lagging well behind others during that time, according to Joel Greenblatt, a hedge fund manager and author of the "The Little Book That Still Beats the Market." More than three-fourths of these star managers spent three years at the very bottom of the performance ladder, something short-term-minded investors tend to flee. But too bad for them. These managers all outperformed over the longer run — the decade-long period through the end of 2009.
https://www.cnbc.com/2016/12/13/berkshi ... oid-mobile

Warren Buffet has had periods where he underperformed the S&P 500 for long periods, yet he is still far ahead overall.

This is why I think that market timing is not more popular. Objective, rules-based systems have been demonstrated to reduce volatility without sacrificing a corresponding amount of return over the long-term, yet they usually underperform buy-and-hold during bull markets. Investors love to have downside protection from markets like 2008, yet most are not patient enough to lag behind from 2009 until the present. The fear of missing out is very real.
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Re: Individual investors, possible structural advantages

Post by Ethelred » Thu Jan 11, 2018 5:16 pm

psteinx wrote:
Thu Jan 11, 2018 5:08 pm
Not to dive too deep, but to expand a little on #2 (munis) and #9 (individual stocks).

Munis: There's already a tailwind for an individual, in certain states, because they avoid even the cheap (but non-zero) ER of a Vanguard national muni fund, and they can buy issues for their specific state (saving state taxes to a degree generally not possible with a national muni fund). I think there can be a further advantage in that an individual may value their research time at $50/hour or $20/hour or even $0 (if they kinda like this sort of thing), whereas a national fund would generally be valuing analyst time at a MUCH higher rate, and thus avoiding certain bonds (especially secondary issues), where research costs would swamp likely excess returns. (i.e. You might have to research 4 bonds to find 1 that's worth buying).

Individual stocks: The ER savings here is smaller, but there's a (potential) structural advantage in having winners and losers more dispersed than they would be in a fund. Imagine a simplified investing universe of 2 stocks, A and B, and one fund F, that invests in those 2 stocks (equal weight). If, some time later, A is up 20% and B is down 20%, then the fund (F) should be flat. The investor who holds F cannot realize a capital loss, nor can he take advantage of the opportunity to appreciate donated shares. But the investor who holds A and B could sell B (realizing a capital loss), and/or donate some A to charity (donating appreciated shares can be more attractive, for tax reasons, than donating cash).

This is a structural thing. You generally have more tax flexibility, in disposing of component individual stocks than you would in disposing of shares of a fund that otherwise held those stocks in the same proportions.
Sorry, neither of those make any sense to me.

For munis, you're saying that institutions can't compete with those individuals who like to value munis as a hobby? Choosing to value your time at zero doesn't represent a structural advantage. And I'm not even convinced it's true.

And you've explained the advantage of holding individual stocks compared to a combined fund well. But how does that represent an advantage for individuals compared to institutions?

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Re: Individual investors, possible structural advantages

Post by Meg77 » Thu Jan 11, 2018 5:21 pm

psteinx wrote:
Thu Jan 11, 2018 3:38 pm

2) Munis - especially in state, secondary market, tough to analyze stuff. This is less applicable if you're in a state with a very good (i.e. generally Vanguard), state specific muni fund. But for those of us without, we've already got a tailwind from state tax savings. I'm in Missouri - 6% state tax. So, if I find good munis with a 4% yield, I'm saving almost 24 bp in state taxes (I probably would still get a BIT of state tax free stuff in a national muni fund), plus around 9 bp in E.R. on a cheap fund. So that's about 33 bp to offset commissions, spreads, research time, and a somewhat riskier portfolio (less diversified). But I think the real boost is that I can research individual secondary market issues, and find some that I think are particularly attractively priced. A $1B (or $5B) fund doesn't want to spend a lot of time researching the $30K slice of some old unrated issue that just came onto the secondary market. I *can* research this relatively efficiently. It's a potentially deep topic, so I'll stop there for now, but am willing to engage in further discussion.
I've been thinking about this a lot lately. My mom just inherited a large portfolio of muni bonds that are actively managed, and I'm having trouble recommending that she sell them all and buy the VG total bond market index instead (she's got plenty in equities in her own portfolio; keeping this bond portfolio will put her at about 50/50 AA). There does seem to be some added value in this space for active management despite the higher fees (which we are still waiting to have confirmed).

The bonds are managed by a firm out of Boston (Breckenridge if anyone has any info on them...). There are about 50 of them maturing over the next 12 years. Most have coupons of 4-5%, though the weighted average market yield is 1.96%. I'm really torn. The fee is going to be a big chunk of her return - but then again even the vanguard muni index charges 20 bps with a lot less personalized benefit.
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psteinx
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Re: Individual investors, possible structural advantages

Post by psteinx » Thu Jan 11, 2018 5:24 pm

Ethelred wrote:
Thu Jan 11, 2018 5:16 pm
For munis, you're saying that institutions can't compete with those individuals who like to value munis as a hobby? Choosing to value your time at zero doesn't represent a structural advantage. And I'm not even convinced it's true.

And you've explained the advantage of holding individual stocks compared to a combined fund well. But how does that represent an advantage for individuals compared to institutions?
Munis: Let's say there's a block of $30K of a secondary issue muni. It's unrated, and to see if it's priced attractively, you'll need to do some reading and research. Let's say that muni has about 10 years to maturity or likely call date, and, based on previous experience, if it's attractive, it'll be about 1% better yielding than something comparable that institutionally sized, S&P rated, liquid, etc. That extra 1% per year, times 10 years, times the bond amount, is about $3K in "extra value", if it's any good. You should perhaps discount that a bit for liquidity, etc. Call it a $1500 "win" if it turns out good. But you also know, based on experience, that you'll have to look at/research several like this for every one winner.

Will Vanguard High Yield T-E be researching this bond? Unlikely. Will Van Eck or some other big fund? Maybe. But I'm guessing most of them will give it the most cursory look, at best, screening it out based on size. But can an individual operate in this space effectively, even if they value their time at some non-zero value? I think so.

As for individuals, it's not an advantage of John Doe versus Vanguard per se, but an advantage of John Doe buying individual stocks versus him buying a Vanguard fund. It's not that Vanguard is doing something wrong, or they're stupid or whatever. It's just a fact (per my understanding anyways for US investors and funds), that a typical fund cannot pass capital losses through to the investors in that fund. But investors holding the same stocks CAN realize losses by selling individual losers.
Last edited by psteinx on Fri Jan 12, 2018 2:17 pm, edited 2 times in total.

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Re: Individual investors, possible structural advantages

Post by ThrustVectoring » Fri Jan 12, 2018 2:13 pm

Individual investors also get financing terms that generally aren't available for institutional investors - home mortgages. The prepayment and refinancing options are excellent and very competitively priced.
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Re: Individual investors, possible structural advantages

Post by packer16 » Mon Jan 15, 2018 9:06 am

The structural advantage of individual investors is the long time horizon they have for some of their money. This can provide an advantage in a panic as they can provide liquidity to selling shareholders. This can also be an advantage in small niches of the market where an individual has specialized knowledge as a result of their job or interests that can be combined with the long time horizon to purchase undervalued securities. While institutions have an informational advantage, they do not have a monopoly on how the information is processed & whether they can take advantage of the mispricing if it is in smaller securities where it will not make a difference to their bottom line. While most want a diversified portfolio, this targeted purchase of individual stocks either in a panic or based upon situation specific circumstances can be a value-add for a portion of your portfolio. The key in the targeted approach is knowing what you know and what you do not know & this can take some time to develop. IMO the targeted approach can add much more value for the effort than tilting or other "macro" techniques. I have added about 19% per year vs. the S&P 500 and 13% per year vs. small cap value since 2000 doing this. SCV tilting added about 6% per year over the same period.

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Re: Individual investors, possible structural advantages

Post by lazyday » Sat Nov 16, 2019 9:15 am

Savings bonds.

Both I and EE bonds allow early redemption. I has a small or no penalty. Planning to hold an EE for 20 years, we might imagine a penalty that grows with time. There are posts estimating the value of these options to redeem early, perhaps by user market timer.

I bond yield is sometimes greater than intermediate or even long TIPS yield (or a theoretical zero) and if held exactly 20 years, EE bonds at 3.53% sometimes greater than a 20 year zero Treasury.

Tax advantages can include deferral, no state tax, and tax free if used for education.

(old thread but worth a look if you haven’t seen it)

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Re: Individual investors, possible structural advantages

Post by BuddyJet » Sat Nov 16, 2019 9:39 pm

Meg77 wrote:
Thu Jan 11, 2018 5:21 pm


I've been thinking about this a lot lately. My mom just inherited a large portfolio of muni bonds that are actively managed, and I'm having trouble recommending that she sell them all and buy the VG total bond market index instead (she's got plenty in equities in her own portfolio; keeping this bond portfolio will put her at about 50/50 AA). There does seem to be some added value in this space for active management despite the higher fees (which we are still waiting to have confirmed).

The bonds are managed by a firm out of Boston (Breckenridge if anyone has any info on them...). There are about 50 of them maturing over the next 12 years. Most have coupons of 4-5%, though the weighted average market yield is 1.96%. I'm really torn. The fee is going to be a big chunk of her return - but then again even the vanguard muni index charges 20 bps with a lot less personalized benefit.
Another option is to move the bond portfolio to a regular brokerage (I like Fidelity for muni bonds) and go passive until issues mature.

I was in a similar spot and decided that the management fee of 0.50% was too high a hurdle to overcome. Unlike many on this board, I prefer individual muni to funds for a large account.
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Re: Individual investors, possible structural advantages

Post by willthrill81 » Sat Nov 16, 2019 9:47 pm

lazyday wrote:
Sat Nov 16, 2019 9:15 am
Savings bonds.

Both I and EE bonds allow early redemption. I has a small or no penalty. Planning to hold an EE for 20 years, we might imagine a penalty that grows with time. There are posts estimating the value of these options to redeem early, perhaps by user market timer.

I bond yield is sometimes greater than intermediate or even long TIPS yield (or a theoretical zero) and if held exactly 20 years, EE bonds at 3.53% sometimes greater than a 20 year zero Treasury.

Tax advantages can include deferral, no state tax, and tax free if used for education.

(old thread but worth a look if you haven’t seen it)
CDs can present individual investors with a 'free lunch' compared to other fixed income choices as well.
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Re: Individual investors, possible structural advantages

Post by nedsaid » Sun Nov 17, 2019 9:16 pm

Not sure there is all that much structural advantages for individual investors as we are simply outmanned, outbrained, and outgunned by the large institutions. A few that I can think of that perhaps individuals can exploit:

1) Tax loss harvesting in a taxable portfolio of individual stocks when the opportunity presents itself. I would not recommend individuals try a high turnover strategy to capture a lot of relatively small losses. Certainly such opportunities for tax loss harvesting will come up and by all means take them but don't overdo this.

2) Physical Real Estate. Not so many folks willing to do this as you are levering up to do this and real estate can be risky, particularly with the possibility of bad tenants. A lot of this is sweat equity and knowing your local real estate market. Some folks are cut out to do this, particularly being assertive with tenants, but most of us are not. It helps to be handy with tools. My state is moving in the direction of "anti-discrimination" tenant laws which are moving in the direction of effectively making it illegal to screen tenants. No thank you. Sort of like lending out money without doing a credit check.

3) Individual Muni-bonds. I don't recommend this. Whenever you own individual bonds, you wind up being your own credit analyst. The exceptions to this are General Obligation Bonds of your State and possibly certain revenue bonds. If you are fortunate to have a cheap State specific muni-fund for your State, let them do all the research. Another issue is that many individual bonds in general trade pretty thinly, commissions and bid/ask spreads might be more than you think.

4) Closed End funds. There was a guy who used to appear on Public TV, I forget if it was Wall $treet Week or Nightly Business Report, once a year to promote his strategy with closed end funds. Pretty much you would buy them later in the year, probably to take advantage of tax loss selling and then sell them after the New Year after the discounts to Net Asset Value would tighten up again. It used to be like taking candy from a baby but the market has probably taken this away.

5) Building your own index. Not sure I would try this, why try to work at something that Vanguard or Fidelity will do for you almost free? The idea is that you will harvest tax losses, I am pretty dubious about an individual trying this strategy on their own, there are institutions like Fidelity and certain Robo-Advisors that will do this with a higher turnover strategy. Not sure individuals can do this without a significant performance drag. If you were not following a tax loss strategy but just creating your own buy and hold index, hard to fathom that you would do this better than the people who do this for a living and who have the resources of a large institution. The cost savings would be miniscule.

6) Individually held Micro-Cap stocks. This CAN be done, you need good research to buy gems undiscovered by Wall Street. Also you can scan the so-called Pink Sheets for thinly traded stocks to mine the gems. Again, this takes time and effort. Not sure how timely the financial information is when you dig for it. Also, when you buy a stock, it is largely a bet on management. You really need a way to evaluate the management of these companies. Here you could take advantage of the illiquidity premium.

7) Not having to join the performance derby. As an individual, you can focus upon the long term and not worry about year by year and quarter by quarter performance of your competitors. Don't have to buy certain investments because everyone else is buying them. You don't have to publish your investment results. In certain situations, you might be able to beat the institutions at their own game with patience.
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Re: Individual investors, possible structural advantages

Post by nedsaid » Sun Nov 17, 2019 9:43 pm

packer16 wrote:
Mon Jan 15, 2018 9:06 am
The structural advantage of individual investors is the long time horizon they have for some of their money. This can provide an advantage in a panic as they can provide liquidity to selling shareholders. This can also be an advantage in small niches of the market where an individual has specialized knowledge as a result of their job or interests that can be combined with the long time horizon to purchase undervalued securities. While institutions have an informational advantage, they do not have a monopoly on how the information is processed & whether they can take advantage of the mispricing if it is in smaller securities where it will not make a difference to their bottom line. While most want a diversified portfolio, this targeted purchase of individual stocks either in a panic or based upon situation specific circumstances can be a value-add for a portion of your portfolio. The key in the targeted approach is knowing what you know and what you do not know & this can take some time to develop. IMO the targeted approach can add much more value for the effort than tilting or other "macro" techniques. I have added about 19% per year vs. the S&P 500 and 13% per year vs. small cap value since 2000 doing this. SCV tilting added about 6% per year over the same period.

Packer
You must be operating in the Small-Cap/Micro-Cap area of the stock market. Sometimes dealing with smaller publicly traded companies in your geographic area can give you an edge. Hard to fathom that you could do this with Large Cap stocks which are liquid and well followed by Wall Street Analysts. You might have opportunity with certain Mid-Cap Stocks but again it helps to have local knowledge. To benefit from panics, you would need a fair amount of liquidity, the gains from buying during panics would have to offset the drag from holding lots of cash during more normal markets. No doubt in my mind that an individual CAN do this, I am skeptical that an individual can beat the market by as much as you claim. The professional traders are always looking for inefficiencies, not sure how far down market cap this goes. Certainly computer programs and trading algorithms crunch numbers to find market inefficiency in Smaller stocks but again not sure how far down market cap this goes. There may not be much of any premium to capture in the Mid-Caps, some in the Small-Caps perhaps, it seems the most fertile area is in the Micro-Caps.

As I recall, you value businesses for a living. This would give you a tremendous edge over the rest of us. This would be a rather time intensive activity. There used to be a newsletter, called the Red Chip Review that would follow smaller companies. Don't think it exists anymore but I do see a Red Chip company that does investor relations for Small and Mid Cap Companies. So in the smaller stocks, there are opportunities. Not sure how much of a premium there is to capture.

The academic research does show that indexing works pretty well in the inefficient areas of the stock markets of the world, hard to say how much Alpha there is for active managers to capture. An individual could buy the really small stuff, stocks that lack the trading volume and market cap to be investable by the institutions. Too much market impact cost. You must be working in the Micro Caps.
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