Individual investors are often thought to be less skilled but they also have a few edges.
They don't have short-term pressure on performance and are able to hold cash.
They are able to take advantage of the small firm effect.
They are free to focus on the best-performing stocks in their portfolio.
Peter Lynch believes the individual investor is able to make smart investments in their day-to-day lives before Wall Street.
A lost cause?
Individual investors(or retail investors) are often thought to be less knowledgeable, less disciplined, less skillful, and more prone to behavioral and emotional errors than professionals.
Does it mean Individual investors are doomed to be a lost cause?
Actually, you may have a few advantages that institutional investors don't have!
TIME is the biggest edge you have!
Time to watch a business grow and compound in value. Time to watch a business shrewdly reinvest capital into additional growth opportunities to return multiples of your original investment.
On the opposite side, most institutional investors are on the clock. They are forced to chase performance, constantly looking over their shoulders to make sure no one is gunning for them.
Institutional investors and fund managers with lagging performance often see dramatic fund outflows; hence, it's crucial for them to be the hottest stocks at any point in time.
Also, as an individual investor, you are able to hold cash!
Individual investors can sell out of the market when the prices are high and wait for a better buying price, further improving their potential return on investment. Institutional investors however are more likely to be unable to do this because of regulations and investor pressure.
Time is a really underappreciated advantage that institutional investors just don't have.
Key takeaway：Institutional investors are on the clock but you're not. Keep it in mind and be patient!
Available for smaller investments
Individual investors have the freedom to invest in companies of any size and are able to invest in smaller companies. Larger, institutional investors may be limited in the kinds of investments they can consider because they have such large amounts to invest.
Most of the time they only cover those big companies and ignore some small companies with growth prospects. As a result, individual investors are able to take advantage of the small firm effect.
Note: The small firm effect is a theory that holds that smaller firms, or those companies with a small market capitalization, outperform larger companies.
Diversification or focus? Your choice!
Diversification is often a mandatory requirement for institutional investors.
Moreover, liquidity is another concern for institutional investors because they have a much greater impact on stock prices and the volume at which they trade can make it harder to buy and sell.
That's why they are not able to take a deep bet when they are very optimistic about a stock.
Individual investors however are able to buy and sell shares at a small scale, stock prices are unaffected by their buying or selling actions. They are free to focus on the best-performing stocks in their portfolio as they are expected to manage risk themselves.
Peter Lynch: spot good investments in daily lives
Peter Lynch is a famous American investor. He has also often said that the individual investor is potentially more capable of making money from stocks than a fund manager because they are able to spot good investments in their day-to-day lives before Wall Street.
Lynch believes the individual investor is able to make similar smart investing choices noticing particular opportunities like Dunkin' Donuts or paying attention to business trends in their careers and hobbies.
Key takeaway：You might just be looking at some ten-bagger stocks every day in your life!
It just seems even more true when you think about it:
Your mobile phone could have been made by $Apple Inc(AAPL.US)$; your car could have been made by $Tesla, Inc.(TSLA.US)$; you might just have shared your moments on $Facebook Inc(FB.US)$; perhaps yesterday you just watched a movie on $Netflix Inc(NFLX.US)$ after a quick meal at $Chipotle Mexican Grill Inc(CMG.US)$; if you haven't heard of Chipotle you are probably searching it on Google $Aphabet Inc-CL A(GOOGL.US)$.
It is very likely that you have known these companies and even foreseen their success.
I bet you would be very pleased if you have invested in these companies above.
We are not suggesting you blindly jump into stocks you see in daily lives! Though it is a great starting point for individual investors.
If you are a fan of Peter Lynch, here is the stock-picking approach from him:
First, you should invest only in what you understand.
Second, you should do your homework and research an investment thoroughly.
Third, you should focus more on a company's fundamentals and not the market as a whole.
Last, you should invest only in the long run and discard short-term market gyrations.
Source: Investopedia, Yieldstreet