Monday, June 20, 2011

An Individual Investor's Advantages

I was moved recently to think about where an individual investor's advantages might lie against his professional counterparts. The spur was a James Altucher interview on investing, in which he suggested that you think about where your edge lies against the pros (and other investors) before you make an investment. Put aside for a minute the case of an individual with very particularized knowledge about an industry who very well might know more about a certain market than pros with access to professionally produced information. I'm talking about the individual who picks up Smart Money and sees a stock recommended in an industry he knows very little about.
It seems to me that the individual can (but may not have) an edge in the following areas:

1. Courage to stick with an investment (pros have to show performance over shorter time frames)
2. Longer time horizon to stick with a stock and for it to realize it's assigned potential (same as number 1)
3. Greater powers of imagination in terms of visualizing what a stock and its industry's potential are
4. Higher risk tolerance

These are general advantages, to be sure, but not at all trivial. The first two, standing alone, might be an argument against turning your money over to "pros," as they very well could outweigh any disadvantages the amateur investor has.

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