Investing can often seem like an uphill battle where the smaller players have little chance of competing with the giants. The large ‘players’ have direct access to executives within a company and expensive technology along with armies of analysts that all aid in providing an investment edge that smaller, or retail, investors simply do not have. To add to a retail investors concern of being disadvantaged, they now have to worry about computers trading stocks and reacting to information way before the average person would even have a chance to catch a whiff of anything. While the odds often seem stacked against the little guy, there is no need to despair. Retail investors’ smaller size acts as a double edged sword (or sling?) that can provide advantages when investing.

Faster Decision Making:

When a great opportunity arises, whether it is a specific event or simply a good buying opportunity, smaller investors can jump right in to the investment assuming they have already performed the proper due diligence. The only person they need to answer to is themselves. Larger investors often have to go through some sort of approval process before a purchase decision can be made and also may have to enter the position at a slower pace to ensure that they do not cause a swing in the price of a security. The downside to this advantage is that there can often be intricacies that require a lot of time and research to ensure it is the right decision. Retail investors generally do not have time for this type of in-depth analysis so acting too fast could also work against them.

No Career Management:

Individual investors obviously have to worry about retirement and their hard earned dollars but they do not have to worry about how investing those dollars will affect their career. For better or worse, investment funds employ individuals that like their jobs and even though there may be a good investment opportunity it is not unreasonable to think that the opportunity might be passed up for something that is less ‘out-there’ and a safer career bet. Smaller investors do not have to manage this career risk and can invest in the securities they truly believe are great investments.

Liquidity/Small-Cap Premium:

The larger a fund gets, the harder it is for it to invest in smaller securities that have lower liquidity. This keeps larger players from taking advantage of this small-capitalization premium which studies have shown can provide greater returns than larger capitalization stocks. Fortunately, smaller investors that are longer term focused and keep appropriate weightings in small cap securities should not have as much to worry about when it comes to liquidity issues simply because they are less likely to hold material amounts of shares relative to the float. Further, due to less liquidity and the difficulties larger investors have with investing in smaller capitalization securities, these companies are often less followed and scrutinized by analysts which provides potential for it to be mispriced in the market. Compare a stock that has less than 5 analysts making price predictions to others that can have 50 or more analysts and it can be easy to see how the odds are better in the small-cap space. Just remember there are extra risks that come with these type of securities compared to the widely known large-cap stocks.      

Time Horizon:

This could very well be the greatest single advantage individual investors have against the goliaths of the investment world. Larger investors/firms often feel the need to show strong returns on a shorter term basis. Many are pressured to beat the benchmark annually, if not quarterly, which is probably a self fulfilling prophecy that leads to their underperformance. There could be a great investment thesis that will take a few years to unfold but if it is floundering in the short term there is likely pressure to sell the holding as it is dragging down short term returns.  Unfortunately, this results in missing out on those potentially great returns. Investors who stick it out over the long term benefit from the stock markets long term upward trend, reduce transaction costs and limit the risk of poor timing decisions while allowing the underlying companies being invested in the time to have their strategies unfold and put money back into the investors pocket.

There is no doubt that it is tough out there for the small guys and gals but knowing what puts an investor at a disadvantage is a good bit of knowledge to have that can be turned around and used to an investors own advantage. Retail investors simply do not have the same amount of resources at their fingertips to allow them to find an advantage with investments that are widely followed. Fortunately, with the help of the proliferation of technology/services related to investing, a long time frame and being free from the limitations affecting larger investors; that sling may be all you need to win.