In the previous blog article “The advantages of retail investors“, after receiving a lot of feedback from readers, this article is going to fulfill my previous promise–compared with institutional investors, discussing the disadvantages of retail investors investing in the stock market?
Where retail investors can’t compete
The following items are what I personally think are worth mentioning for your reference:
- Fund: This is the biggest myth of all retail investors, but the indisputable fact is that the institutional investors have obvious advantages in capital scheduling and financial tools, because the investment back to the most fundamental source still requires capital to invest. But please note that capital is a double-edged sword in investment. Except that the law of large numbers will lead to a decline in performance, the number of investable targets will be greatly limited due to regulations and supervision. For details, please refer to my another blog article “The advantages of retail investors“.
- Advantages to obtain information: The chief executives and chief financial officers of listed companies will answer calls from large institutional investors and meet with large institutional investors; but they are unlikely to respond to the flood of retail investors’ questions. Even if compared with a hundred years ago, there is now the United States Securities Regulatory Commission (SEC) and many laws and regulations require listed companies to be open and transparent in the disclosure of material information. After all, there are still many gray areas that cannot be governed by laws. Institutional investors have close contacts and various relationships, and the information is extremely well-informed, which are enough to cause unequal information circulation.
- Inappropriate internal information acquisition by companies that are on the edge of the law: I personally hate insider trading. Although everyone knows that insider trading is illegal, I must also admit that insider trading is ubiquitous. Here are three famous examples that have been heavily reported by the media. For your reference (I emphasize here that insider trading is illegal in every country in the world, so don’t try the law).
Famous cases of insider trading in the U.S.
Fed Vice-Chairman Richard Clarida sold up to US$5 million in equity fund positions in February 2020, and then entered the market on the eve of the Fed’s announcement of interest rate cuts and quantitative easing. The precise timing was to determine the morality of officials. The behavior was criticized by public opinion again. In addition to Clarida, two regional Federal Bank officials, Eric Rosengren (president of Boston Federal Bank) and Robert Kaplan (president of Dallas Union Bank), also announced their resignations after they were involved in stock trading. As a result, Fed Chairman Jerome Powell announced in October 2021 the new official ethical investment guidelines, stipulating that the purchase or sale of assets is prohibited during periods of market pressure.
The SEC accused former Goldman Sachs (ticker: GS) and Procter & Gamble (ticker: PG) director Guberta to participate in the Goldman Sachs board of directors through a conference call on September 23, 2008. He approved Berkshire Hathaway (ticker: BRK.A and BRK.B) purchase of shares, right after approval, he immediately inform the hedge fund industry founder of Galleon Group Lagaratnam, the call time was “seven minutes” before the closing of U.S. stocks market on the same day. The dialogue allowed Rajaratnam to rush to direct his hedge fund to buy 175,000 shares of Goldman Sachs before the market closed, and immediately dispose of it the next day. This in and out made Rajaratnam a profit of nearly $1 million.
Famous cases of insider trading in Taiwan
In 2017, Qiu Huiping, general manager of Taiwan Credit Suisse, who led the acquisition of Hermes Microvision by ASML (ticker: ASML), was involved in an internal merger transaction. The prosecutors believed that she and her husband Xu Yaoren and other relatives and friends were considered by the prosecutors to take advantage of their positions to buy shares in the accounts of related parties before the announcement of the merger case, and to profit after the announcement of the merger case and the stock price rise, which violated the Securities Law. A similar example was the outbreak of Mo Huanwei, a former manager and spokesperson of Richtek, a large power management chip manufacturer, in February of the same year, involved in an insider transaction. Before MediaTek acquired Richtek, the former manager of Richtek bought shares in the name of her husband, relatives and friends, and waited for the stock price. After the rise, the rallies made a profit of NT$ 3 million.
Advantages of institutional investors
- Advantages of equipment: Wall Street has almost a powerful Bloomberg terminal, which makes retail investors at a disadvantage in terms of speed of information acquisition, data analysis, and integration. Not to mention the quantitative investment institutions that specialize in high-frequency and large-volume transactions, or specialize in options and derivative financial products. They have expensive software and hardware and basic connection equipment, and they has an inherent overwhelming advantage in frequent and massive transactions, which is the fundamental reason why it is impossible for ordinary retail investors to profit from such transactions.
- Trading skills: Institutional investment companies have countless review and confirmation mechanisms, and the probability of error is much smaller than that of retail investors with limited experience; therefore, the trading skills are significantly higher than those of retail investors.
- Team advantage: The division of labor of institutional investment units is very clear; a large team has different people responsible for fund management, investment strategies, transactions, and analysis of investment targets. The resources and time they put in are typical collective wisdom, allowing them to conduct dense carpet visits and analysis. Apparently, it is impossible for retail investors to follow.
- Ability required for short-term profitability: Institutional investors have rich experience, have much more financial operation tools and support from the companies behind them than retail investors, which will help them deliver excellent short-term performance, because it will directly affect whether they can keep their jobs.
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