The Portrait Of Stock Market
Most of the time, whenever you as a beginner think to invest in the market, you would be welcomed by a thought that “what edge do you really have?”
Especially when you see such photos where there are more than 10 screens in front of a person
Or, you watch these video:
Or, hear such terms, “Market is currently overbought!”
This is how trading used to look like, earlier in India. At least technology have solved this behaviour):
You don’t need to know what the market is doing, actually it works in your advantage if you don’t know what is happening
But what is the edge of being a retail investor?
You need to remember that these edges don’t work independently and if you try to apply them in isolation then it could be very injurious to your wealth. Retail investors do have some advantages of being in the stock market. Lets look at some of them here.
In for Long Term
Staying invested for the long term is the edge you could gain over other people. It is very simple in concept but very hard in practice.
Long term investing really changes your mindset over how you invest. You start to look at stock as companies and not stocks itself. I believe, this is how it should be.
When you buy a stock you should look at it as if you are buying the company and getting in partnership with the owners of the company.
You must realize just because you can sell and buy shares anytime that doesn’t mean you have to use that option.
Related: Common mistakes investors make
Discipline and Patience
Now, suppose you have decided to be in the game for long term but don’t practice patience then it is of no use. You need to remember that you are investing in the business when you buy shares and not playing around with the quotes.
You should not expect your shares to double within months until you can expect the business to do the same.
Let’s hear it from our godfather, Warren Buffett:
Warren Buffett in the above video beautifully compares buying stock with buying a farm.
Like he says, “if you owned and liked the business prior the downfall of the price, you liked the management and the business has not changed fundamentally then there is no reason to sell. You should not let the interruptions affect you, unless you are leveraged or not psychological not ready.”
Being a retail investor a superb edge you have against the ‘kings of Dalal streets’ is being your boss.
There is nobody to question you or you are not accountable to anyone. You have your freedom to choose your stocks, your sector or you could we decide to hold cash and deploy only when necessary.
Holding on to cash and wait for opportunity seems very scary and required little be experience as you must be very skilled to know when the opportunity arrives
Here is a simple quote by Charlie Munger to explain it:
“It takes the character to sit with all that cash and to do nothing. I didn’t get to where I am by going after mediocre opportunities.”
But a fund manager cannot do that. A fund manager must match their performance with the market and if they underperform they get fired or they must deal with their boss.
This is not it, there is continuous inflow of cash with fund managers. So even if they might be good at stock picking they end buying and buying, which makes their average purchase price not a reasonable valuation for a company.
Micro/small cap investing
This is another edge which retail investors have but it can be dangerous if not followed properly. Small cap companies are generally ignored by many funds as their policies do not allow them to buy certain stocks if there is not enough volume in it.
In simple terms: As stock market is a secondary market where there are fixed number of shares getting traded around people, if not many people for interested in trading a share of a particular company then a fund generally avoids it.
As getting out of such companies could be very difficult. But you need to be very cautious when dealing with such companies as they are more likely to have governance issues as fund managers don’t provide coverage which leads to less information available.
Retail investors have many edge over others its just that they need to realize it. If one would apply the three or four qualities mentioned above I believe they could improve their changes of beating the market significantly.
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