Investment Strategy

The advantages of being a private investor

As a private investor, it’s easy to believe that you’re at a disadvantage to the smooth talking financial professionals. Indeed, in some respects, it’s true that you are disadvantaged. But you also have important advantages in your favour. If you understand what’s going on, there’s no reason you can’t beat most of the professional traders and investors. There are pros and cons of being a private investor.

Let’s deal with the bad news first. Here are your main disadvantages as a private investor, as compared with people that do it for a living:

The disadvantages of being a private investor:

  1. You spend less time on it. They’re on the case at least five days a week, and as long as the markets are open.
  2. You’re a generalist, looking at many things. Most of them are highly specialised, focused on one narrow area.
  3. The information you get is often worse than theirs and always slower to arrive.
  4. Even when you get information, you are slower to react than a professional trader (minutes or seconds) or computer algorithm (milliseconds).
  5. You get worse pricing and pay higher dealing costs.
  6. You may have a worse tax environment to deal with.

Sounds pretty bad, right? But all is not lost. You have some excellent advantages as well.

The advantages of being a private investor

  1. You spend less time on it. While, for most of the week, the pros are packed like sardines in front of banks of computer screens, you’re probably doing something more interesting, useful or fun.
  2. You get to choose where you focus your attention. Being a specialist in some narrow area of the markets can be incredibly boring. Some people do it full time for 30 or more years. In the meantime, you choose where you want to focus your attention.
  3. When it comes to investing, you don’t answer to a boss or clients. You are free to do what you want. If you choose, you can do nothing for a while. Sometimes that’s the best approach.
  4. You have no restrictions imposed on your portfolio by laws, superiors or clients. You choose the best opportunities that come along. You don’t have to stick to one country, or one style of investing, or one asset class.
  5. You’re not forced to own bad investments. You don’t run a “growth” stock fund, where most of the underlying companies will shrink to virtually nothing. You’re not attempting to run a “value” stock fund while valuations are at record highs. You’re not restricted to “income” stocks, when dividend yields are ultra low. You don’t have to put any money into ultra-low yield or negative yield bonds, which are guaranteed to lose money for their investors, in real terms.
  6. No one is paying you to manage their money. It’s your money. As such, there’s no pressure to be “fully invested”. You can have a lot of cash if you want to, if decent opportunities are thin on the ground for a while.
  7. You can be patient. You’re not trying to maximise your end of year bonus or avoid getting fired. You’re trying to maximise profit over the long run, across many years. Distant gratification is often greater than the instant kind.
  8. If market prices fall in the short run it doesn’t matter. No one is benchmarking you to competitors. Angry clients can’t call you up and withdraw their money. Instead, you can ride out market volatility. It’s just something that happens from time to time – a fact of life. Then prices recover. In fact, when prices drop sharply, that’s when you get to use that cash that you’d put aside, and scoop up some bargains.
  9. You can be genuinely contrarian. There’s no pressure to do something because it’s fashionable, “hot”, or (currently) accepted wisdom. Mostly, that just means common sense should be applied. Common sense is much more easily found in private, at home, than within mass, public, crowd spectacles such as heavy metal concerts…or securities markets.

In short: do little but do it well. No one should want to watch a screen all day. An added benefit is that you’ll spend less money on the financial industry (meaning you’ll keep more for yourself).

Tune out the hype. Don’t get sucked into the latest fashions and fads. Or use them to your advantage by putting your money into solid areas that are currently out of favour, and hence cheap.

Make sure you always act consciously and with a cool head. Don’t allow yourself to get emotionally flustered, meaning you react to events without thinking things through.

Above all, take your time and BE PATIENT. Remember, patience is a virtue.

This is certainly true in the world of investment. The best things come to those who wait.

[What did I miss? Can you think of more advantages or disadvantages of being a private investor? If so, send me a message and let me know.]

Stay tuned OfWealthers,

Rob Marstrand

robmarstrand@ofwealth.com


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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.

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