Three Advantages Private Investors Have Over Wall Street Professionals

You may believe that professional portfolio managers and analysts on Wall Street have advantages over private investors.

For starters, the average portfolio manager is likely to have considerably more time to devote to investment research than the average private investor. Portfolio managers will likely have access to powerful investment databases such as Bloomberg and Factset, which may assist greatly in the investment decision-making process. Furthermore, portfolio managers often receive more detailed insights into a company’s performance and future prospects by speaking directly with company management or by dialing into earnings calls.

However, while it may seem that investing is rigged in favor of the big players, there are some significant advantages that smaller investors can take advantage of. Here’s a look at several ways private investors can beat the Wall Street pros.

Long-term horizon

It’s generally accepted that stock market investing is a long-term game. The real power of the stock market comes not from what transpires over the first year or two, but what happens when returns are compounded over a long-term investment horizon. However, ironically AQ: the punctuation is tricky here, because both “however” and “ironically” need a comma after them. My recommendation is to remove “ironically”, as it is quasi-implied here. , professional money managers are usually assessed against a ‘benchmark’ on a yearly, quarterly and even monthly basis – in other words, it’s their short-term performance that counts.

No portfolio manager wants to underperform his or her benchmark, as the ramifications can be significant; for this reason, much of the focus in the institutional portfolio management world is about ‘beating the market.’ This can no doubt be quite stressful, given the unpredictable nature of the stock market.

In contrast, private investors can enjoy a far more relaxed approach to investing, and focus on building a solid portfolio over the long term. In reality, it’s usually not a problem if a portfolio underperforms in the short term. Indeed, it may even enable such investors to take advantage of lower prices and buy considerably more shares in attractively-valued companies. Private investors have the luxury of allowing the power of long-term compounding to do the hard work for them in generating investment returns, and therefore don’t need to stress over market movements in the short term.

Portfolio constraints

Private investors have significantly more flexibility than professionals when investing, as they are not subject to the portfolio constraints that professional portfolio managers often have to endure. For example, a pension fund’s mandate may state that the fund must hold no more than 5% cash, or that the fund can only invest in large-cap US stocks.

In contrast, if private investors want to invest in international companies or buy small-cap stocks, they are free to do so. Similarly, if they believe the market is overvalued and wish to hold 50% of their portfolio in cash, there is nothing to stop them from doing so.

Private investors are also free to adopt a contrarian investment strategy if they wish to. Institutional portfolio managers generally don’t like to stray too far from the herd when making investing decisions. The general belief is that it’s better to be wrong with the herd and maintain job security than face scrutiny and potentially lose your job if you go against the herd.

However, private investors can invest free of judgment, without having to explain every investment decision to management, clients, or the compliance department.

Small-cap opportunities

Lastly, a key advantage that private investors have over the institutions is the freedom to invest in small-cap stocks.

There are literally thousands of exciting, fast-growing smaller companies listed on stock exchanges across the globe, many of which fly under-the-radar of most investors. Whereas a company like Facebook (NASDAQ: FB) or (NASDAQ: AMZN) may have hundreds of analysts closely monitoring the stock, a company with a market capitalization of $200 million, for example, might only have one or two analysts following it, or perhaps even none at all. This can result in lucrative investment opportunities.

Institutional portfolio managers generally have large amounts of capital to invest, and for this reason, most simply choose not to invest in smaller, illiquid companies. As a result, if private investors are willing to research the smaller end of the market, it’s possible to find attractive investment opportunities that may be off limits to the professionals.

Disclosure: Edward Sheldon, CFA has no position in Facebook or

Featured Posts
Recent Posts
Search By Tags
No tags yet.