Kevfle recently posted an intriguing article called “Can we beat the professionals?’ In this he touched on some interesting questions around the investment industry, which provoked a flurry of responses from our fantastic community here at Stockopedia.

Kevfle seemed to have several questions on his mind, including:

  • Can we actually ever outperform the pros?
  • Am I wasting my time?
  • Is it easier to choose and evaluate a group of funds instead?
  • Can I achieve similar results leaving it to the pros?

In the first of this two part series, I will seek to address the first two questions,  investigating where there might be scope for the individual investor to outperform and whether it’s worth the effort.

Can we ever outperform the pros?

In order to answer this, we need to define where our edge is.

Firstly, let’s take a look what we are up against. Our competitor investment management company has an army of analysts, each highly qualified with an MBA, PhD and several investing qualifications. They are able to assign individuals not to look at a whole market, but investigate businesses within an industry or in some cases just a handful of companies that the analyst will eventually get to know better than their CEOs. All of these ideas are pitched to the fund manager who then decides, with help from their 6-figure-per-year risk system, how to construct the portfolio.

The scale advantages may seem overwhelming, but there are several disadvantages that the institutional investor must contend with. It is in these disadvantages that the private investor can seek their edge.

The first is liquidity.

Investor Edge 1 - Liquidity

“It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.” - Warren Buffett

“If I were working with a very small sum – you all should hope this doesn’t happen – I’d be doing almost entirely different things than I do. Your universe expands – there are thousands of times as many options if you’re investing $10,000 rather than $100 billion, other than buying entire businesses. You can earn very high returns with very small amounts of money.” - Warren Buffett

The average equity fund manager has around £650m in assets. This means that if they want to allocate 4% of their fund in a…

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