Most retail investors do not believe they have any advantages
I know that most people disagree with this title, which is why I want to write this article. I had doubts about this sentence before. I certainly agree that retail investors have some disadvantages when investing in the stock market (please refer to another article on my blog article “The disadvantages of retail investors“); for example, retail investors do not have capital Advantage, but successful investors can use long-term investment and continue to maintain a high success rate to overcome this disadvantage. Real successful investors will not equate the amount of funds that investors have with the success of stock market investment. This is one of the common myths of ordinary retail investors.
The advantages I think retail investors have
The following are what I think are the advantages of retail investors when investing in the stock market:
- No need to be restricted by regulations: this is the biggest advantage. As retail investors, it is difficult for us to understand the legal restrictions imposed on institutional investors or so-called real big stock market investors. The more important regulatory restrictions are as follows:
- The U.S. Securities and Exchange Commission (SEC) requires institutional investors with assets of more than 100 million U.S. dollars and above to disclose quarterly reports on Form 13F, compulsory disclosure of investment objects and amounts during the period.
- The fund must not invest in any company more than 10% of its shareholding (this figure also applies to mainland China), as long as it invests in any company more than 5% of its shareholding, it must report to the US Securities and Exchange Commission in a 13D form within ten days. When the beneficiary’s shareholding changes more than 1%, it must also be reported to the US Securities and Exchange Commission on Form 13D.
- It is not possible to invest more than 10% of the fund in the stocks of a single listed company.
- During the IPO period, a 180-day lock-up period must be observed, which stipulates that the IPO holdings on hand cannot be sold within 6 months to avoid taking advantage of retail investors.
- Take Taiwan’s laws and regulations as an example. There is a requirement for equity funds to hold more than 70% of the shares, and long-term idle funds are not allowed. However, newly established funds have a buffer period of up to six months and are not subject to restrictions on shareholding ratios.
- Funds managers (including stock funds, ETFs, hedge funds and other funds) need to face the pressure of fund buyers to redeem. When the market is stable, it will not happen. Even in a bull market, many popular funds will even close their funds and no longer accept applications from new investors. However, when the market conditions are bad, especially when the market crashes, most fund purchasers will flock to them and compete to redeem them. In order to raise the cash payment required for redemption, fund managers have no choice but to be forced to sell stocks, even stocks that are optimistic about the market outlook; this is one of the main reasons for the acceleration of the stock market’s decline during the market crash.
- Retail investors can buy and sell according to their own will and investment principles, completely under their own control. Long-term investment is one of the factors for the success of stock market investment, but institutional investors are hardly allowed to adopt this well-known success factor (this is also one of the main reasons why most foundations are lagging behind the market). In addition to having to abide by numerous regulations and restrictions, there are more breathtaking and unreasonable rules within their own company, layer-by-layer review that have been too long to lose opportunities, lay leaders and experts, and undocumented industry rules that need to be followed (such as forced to buy a large number of stocks in a company that will not be perform well), these are the culprits that stifle the performance of the fund. For Taiwanese fund managers, the regulations stipulate that they must put the cash of fund purchasers in their accounts into the stock market within 180 days. In the stock market, any forced transaction (including fund managers who are forced to sell shares when the stock market crashes) will have regret results and will never end well.
- Institutional investors react more slowly: Institutional investors with larger funds under management, except for a bunch of internal and external regulations, are like carts or ships turning slowly. Due to the huge amount of funds, institutional investors must take a long time (in proportion to the size of the funds they own) to buy or sell the target number of shares in the plan. In particular, a little turmoil in the market by a slightly well-known person will cause a great follow-up effect or unfavorable side effects. For example, if the speed of opening a position to buy is too fast or too early to disclose, it will quickly raise the market price of the stock, and it will be disadvantageous to open a position. But ordinary small retail investors, because the funds are much smaller, they can buy or sell any number of stocks very efficiently at any time.
- There are fewer stocks for institutional investors to choose from: if careful readers read the restrictions of the first regulation I listed, they can quickly find that institutional investors can invest in much fewer underlying stocks than retail investors. Small retail investors like you and me can invest in the stocks of all listed companies. Buffett once complained that there are fewer than 200 stocks available for him to choose from (the U.S. publicly listed stocks have about 4,000 stocks, and if OTC and pink market is counted, there are a total of more than 11,000 stocks).
- Large-scale institutional investors are not keen to invest in small stocks: even if they buy less than the amount allowed by regulations and perform as expected, their portfolio performance will not be significantly helpful, because the position is in the proportion of the total amount in the portfolio must be small (see the first point for the reason); this has caused many large institutional investors not to be keen on small-cap investment, or directly expressly prohibited it, at least not encouraged. But most of the successful super growth stocks were small stocks when they first went public. The most ferocious rise of these successful super growth stocks was in the first few years of their listing, that is, the market value was still small stocks. . This alone makes it a blessing to be a retail investor.
- Institutional investors must always face short-term performance appraisal: This is the main pressure that institutional investors face. In order to keep their jobs, they can only lay out short-term, and just ask not to lag behind their peers significantly (please note that usually 3/4 of peers’ performance rate is behind the market). As a result, institutional investors will not buy stocks that they really like, but buy stocks that their peers are optimistic about; their mentality is “I don’t pursue high returns, but I can’t lose too much of my peers.” As a result, institutional investors are racing to pursue short-term performance, and they rarely make long-term investments, which makes it impossible to produce good performance; because long-term investment is a necessary condition for good stock investment performance.
It fact that retail investors have advantages
After reading the restrictions on institutional investors I have listed above, rational retail investors should suddenly realize that they are fortunate that they are not bound by these regulations; even they are inherently more advantageous than institutional investors.
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