5 Advantages You Have in the Market

Sometimes average investors have an edge over those with far more money.

Feb 4, 2014 at 11:24PM

In the first part of this series, I noted five disadvantages average investors have in today's market. But before you stuff all your money under your mattress, you should know you have advantages of your own. It may surprise you, but there are some places where the big money lags behind.

1. Allocation flexibility
Many funds are managed with a stated goal in mind. It may be called "small cap," "aggressive growth," or "dividend-only." In many cases, this restricts what the portfolio can be invested in. Even if the manager of the dividend-only fund sees a non-dividend stock trading at an excellent valuation, he or she couldn't buy it because it would violate the structure of the fund. Many institutions also restrict purchases of stocks trading under $5 per share or under a certain market cap, keeping these traders from purchasing what are sometimes excellent values or growth prospects.

Even in cases where the company has noted its intention to pay a dividend in the future, dividend-only funds are usually restricted from buying. After noting the probability of a dividend months before each announcement, shares of Delta Air Lines (NYSE:DAL) and American International Group (NYSE:AIG) both posted strong gains on the days when the dividends were officially declared.

If you spend the time to search out the best investments, you have the flexibility to invest in pretty much anything you want. A blue-chip bond to go in your otherwise speculative growth portfolio? Why not? An emerging tech company to mix in with your dividend picks? Go ahead.

2. Control of cash flows
Many people question why fund managers sell so much stock at the bottom of the market only to be buying back in as it rises. But, to their credit, the decision is often beyond their control. Clients have their money in a fund, and when a recession hits, they need it back. When lots of clients need their money back, the fund needs to sell at the bottom -- a.k.a. the worst possible time.

While some average investors are unfortunately forced to also sell at the bottom to make ends meet after the loss of a job, those who remain on solid financial footing can choose to ride out the storm or even put more money in. And there certainly is potential here. Had you put your money into an index fund based on the S&P 500 during the bottom of the market, you would have more than doubled your investment in only a few years

3. Small money
If you remember, I noted in the last part of this series that Warren Buffett's name and billions of dollars get him better deals than the rest of us. But Buffett doesn't count out the small investor. In fact, he has some interesting thoughts about investing an amount smaller than he has now. As noted in Business Insider, Buffett says:

If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.

While Buffett does put it best, I will attempt to paraphrase. Basically, Buffett argues that with a smaller amount of money, investors can achieve much higher percentage returns more easily.

And this makes sense, too. After all, a lot of small-growth companies would be completely missed by Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), since even their wildest success would only make a dent in Berkshire's bottom line. So for anyone with a sub-billion-dollar portfolio, you at least have a structural advantage over Buffett.

4. In the trenches
Financial analysts tend to see things from a financial perspective and miss many big growth stories as a result. Although market analysis may not be your trade, if you're involved in something like technology, design, or engineering, you could see the next big growth story before the financial types do.

Remember when Tesla Motors (NASDAQ:TSLA) was the unprofitable niche company that made an electrified Lotus and was going to be bankrupt in a year? Today, close followers of Tesla who bought in at the IPO have seen their money multiply over eightfold. So just because you don't spend your day glued to the markets doesn't mean you can't find the next investment growth stories.

5. Fees and commissions
If you read the first part of this series, you probably remember I listed this as a disadvantage to average investors. But while fees and commissions do eat up a larger percentage of each trade, many investors who have larger amounts of money turn it over to an actively managed fund.

At first it seems like the smart thing to do. After all, how could someone getting paid so much to manage your money actually be worse than an index at it? Turns out, in most cases and when fees are taken into consideration, they are. So if you want a leg up on your rich uncle's investment in an actively managed equity fund, go grab a piece of an S&P 500 index fund.

The average investor can win
The stock market is not where average investors should expect to get rich quick but, through a combination of advantages and disadvantages, an average investor who follows the basic rules of investing so be able to generate meaningful returns. Part of investing is knowing where your advantages and disadvantages lie and average investors have plenty of both.

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Alexander MacLennan owns shares of Delta Air Lines and Tesla Motors. He also has options on Delta Air Lines and is long AIG warrants. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. 

The Motley Fool recommends and owns shares of AIG, Berkshire Hathaway, and Tesla Motors and has options on AIG. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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