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The thoughtful, dedicated private investor can outperform the professional fund manager due to his/her many advantages, including the ability to concentrate a portfolio on only the top ten bargains; to take the risk of being different from the herd; to avoid institutional constraints, and; to find good companies from everyday experiences.
The small investor should not feel intimidated by the professional. Fund managers are subject to so many constraints and susceptible to so many errors in logic and flaws of character that the well-equipped private investor, following sound principles, can out-perform them. In years past I’ve have helped in the training of many fund managers. While they are generally very capable at the quantitative analysis – they have CFA qualifications after all – when it comes the more important qualitative and the following of simple and sound investment principles (rather than speculative principles) well, let’s just say, many drift a little.
Very high IQs are in abundance in the major financial centres around the world. But very high IQ is not a requirement to be a good investor. Peter Lynch, one of the best ever fund managers, apart from saying that all the math you need in the stock market you get in the 4th grade, declared “The true geniuses, it seems to me, get too enamoured of the theoretical cogitations and are forever betrayed by the actual behaviour of stocks, which is more simple-minded than they can imagine. It’s also important to be able to make decisions without complete or perfect information.” (One up on Wall Street, 1990)
There is a tendency to miss the wood for the trees; a mass of data can cause some to make elaborate scrutiny and synthesis of non-essentials. Share investing is an art that blends knowledge of history, psychology, sociology, business strategy analysis, economics and political science as well as data “facts” from the past. Quantification alone will not do.
I’ve probably not convinced you yet that a switched-on private investor should not be intimidated by a professional; perhaps another quote from the most respected fund manager ever will help: “To the list of famous oxymorons – military intelligence, learned professor, deafening silence and jumbo shrimp – I’d like to add professional investing….[The] notable exceptions are outnumbered by the run-of-the mill fund managers, dull fund managers, comatose fund managers, sycophantic fund managers, timid fund managers….and copy cats hemmed in by the rules.” (Peter Lynch, One up on Wall Street, 1990).
What are disadvantages of the professional?
- They have to move a long way down the diminishing marginal attractiveness curve.
Imagine that each investor put all those shares for which they have conducted analysis in an order based on attractiveness. The number one share on the list would be a real bargain – trading at a low price relative to the future cash it is likely to generate for shareholders. The second is also a very good buy, but is slightly less good than number one. The third share – the “marginal” one – has diminished attractions relative to the second one. And so on, down to, say, share 35 which is a lot less interesting than the first few on the list.
Professional investors are instructed, nay drilled, that they ………….
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