Disclaimer: the main purpose of this note is to help myself distill and internalize the information from the investment books, mags and websites I read. If you feel it’s informative, I’d be very glad. But please do not take it as your investment guide. People have different personalities, what appears very right to me, might be totally wrong to you. Please do your own research for your investment.
Institutional investors put aggregated individuals’ assets into capital market. Today the fund volume of super investment institutions are so huge that they are the trend makers and the rule makers in the capital market. So, it is important to learn the rules of investing game from the investment institutions: their stock-picking principles, their valuation methods, their reasons for buy and sell. If you learnt it and keep doing homework on investing, you could do better as an individual investor, rather than handing your money over to institutions and let them invest for you.
First of all, you save the management cost. Cash flow is important. Very important. Do not give it up.
Second, if the market is not performing well, managers of mutual stock funds have the problem of large-volume withdraw, you do not. As long as the companies you own still have strong fundamentals and you did not borrow money for investing, you can simply sit until the price goes up again. Mutual funds’ managers know they should sit but they could be forced to sell by the people who want to withdraw. Why should other people’s ignorance hurt your capital’s performance?
Institutional investors always hedge their risk and often want to buy insurance from individual investors. Stuff like warrants, stock futures, accumulators, etc. are institutions’ insurance contracts by nature. Your chance is very small. Do not gamble against the institutions using your hard-earned small money.
How can individual investors reduce the risk then? Diversification like institutions is not good option. Your money volume is too small to be diversified meaningfully. Rather, you should concentrate on good companies. If you don’t like reading companies’ 10Ks and 10Qs, just gauge your favourite fund’s top holdings list and get shares of the top 3 or 5 companies in the list. Risk is reduced by thoroughly knowing the businesses you own (know their economic moat, know their business models, know their management, know the appropriate valuation methods, know all the 108 important ratios and figures….), not by diversification.
If, you think your private time is better spent on something other than reading and analyzing companies’ annual reports, then at least turn to some good institution and ask them to invest it for you. It is 21th century now, your hard-earned money can find a better way out than the 5% fixed rate from any bank.