5 reasons an individual investor can outperform the institutions
We're not screwed, after all...
At first glance it might seem an insane proposition that an individual can outperform an economic Goliath like a hedge fund. Simply ludicrous! Yeah well, fuck it. Why not try? In fact I think that there are a couple of reasons why an individual can outperform the big guys. What do you think? Are these valid reasons or am I coasting on hopium and Russian diet pills?
1 - No capital redemptions
IMO an unbounded time frame is the individual investor’s most significant edge. Hedge funds have to deal with uncertain redemptions that may (and most likely will) come at the worst moment.
Every strategy is going to have periods of time where it underperforms. As individual investors we can recognize that we’re in a bad environment and wait it out. The hedge fund, on the other hand, has to worry about redemptions. Besides causing flaccidity in the bedroom, redemption anxieties can force a hedgie to take fewer calculated risks or asymmetric bets that might take a year or two to pay off.
2 - Not bound by quarterly results
In a similar vein of fuckery, many a hedge fund is measured by quarterly results. How screwed up is that? How can you have an investment thesis that might take 2 to 5 years to play out, if you’re worried about what you’re results will be in 46 days?
As individual investors the quarter end or year end means nothing. We can use whatever time frame we want to judge our results, depending on what type of strategy we’re employing.
3 - Invest anywhere
To a greater or lesser degree, institutional investors may be constrained by certain norms. For example, they can’t invest in tobacco, or oil & gas, or crypto. Even when these rules are not codified in the prospectus, the institutional investor may feel constrained by the disapproval of their peers.
As individual investors we can put our money wherever we goddamn please. I refuse to invest in China because I think their government is evil and I’m strongly against concentration camps and social credit systems. Apart from that communist mess though, I have an utter lack of scruples. I’ll put my money anywhere I think the returns will be good.
4 - No career risk
Career risk is a somewhat vague topic that I hear get tossed around in podcasts from time to time. As I understand it, if an institutional money manager makes a serious error they can get fired. Especially if they make a non-consensus error. This is why you’ll hear people say inanities like, “It’s better to be wrong with the crowd than right on your own.” Or, “Nobody ever got fired for buying IBM.”
We retail schmucks have no career risk. We have the risk that we lose all our money because we’re idiots, but at least we don’t have to worry that we’ll get fired for making a non-consensus investment.
5 - Easier to enter and exit positions
Retail investors can use the “market buy” and “market sell” button. Not that it’s recommend, but it’s an option. A $500 million hedge fund, let alone a $5 billion hedge fund, cannot market sell anything. They have to think carefully about how they’ll enter and exit every position. Many great opportunities in low market cap assets are unavailable to the big guys. Nearly penniless peons that we are, we can invest without moving the markets.
Final thought
It is my theory that to beat the market we should understand our edge. I find my own edge to be my freedom to invest in any asset class, and my ability to enter and exit positions at the drop of a dime. Also, I can hold under-performing assets on the expectation that they’ll improve in the future. No concern to the emotional well-being of some antsy LPs.