5 Disadvantages You Have in the Market

How can you work around the disadvantages that come with not having millions of dollars to invest?

Feb 4, 2014 at 5:15PM

Life's not fair, and neither are the markets. But to better understand where and when to invest, it's best to know where your advantages and disadvantages are as an average investor. In this article I will cover five disadvantages average investors face -- and in my next article I'll show you where the average investor has the edge.

1. Light-speed trading
When it comes to trading, it really doesn't matter how fast your reflexes are. Unless you can see the future, a computer many times more expensive than your own can beat you to it.

The biggest trading firms and financial companies have massive infrastructure ready to execute trades at a moment's notice, so don't try to build your trading strategy around clicking your mouse before everyone else.

2. Advance notice
If you think all information becomes available to everyone at the same time, you're wrong. For a fee, some traders can gain access to a market-moving number before nonpaying investors. One set of consumer confidence numbers is made available to those willing to pay a full five minutes before the information is made public.

But not even all the paying traders get the full advantage. An even more elite group gets the numbers two seconds before the rest. And with all those computer trading systems, a lot can be done in two seconds. Bottom line: Brace yourself for a market move either way, because you won't have first dibs on the numbers.

3. Name recognition and bulk buying power
A lot of people cite Warren Buffett's 2011 investment in Bank of America (NYSE:BAC) as a reason to buy the stock. While I still like B of A for the long run, you should consider the fact that Buffett got a much better deal than any average investor could. For $5 billion, Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) got $5 billion in preferred stock yielding 6% and warrants for 700 million common Bank of America shares with an expiration date 10 years out. And if B of A wants to buy back the preferred stock, it will have to pay a 5% premium.

Buffett brought both his name and his money to the table. Not only did Buffett offer more money than any average investor could, but the confidence given by his name is a valuable asset when a CEO is trying to restore confidence in a bank following a financial crisis. So try to invest like Buffett, but remember: He can get better deals.

4. International access
Hedge fund managers and large financial companies can trade almost anywhere they want in the world at the drop of a hat. But finding the best opportunities internationally is more difficult for average investors. Consider that in 2013, Venezuela, Zambia, Nigeria, and Pakistan had four of the 10 best-performing stock exchanges.

Average investors can mitigate this lack of international options to some extent. Some brokerage firms offer accounts for international investing. But even with the help of these brokers, frontier markets will be out of reach for many average investors. For those still interested in frontier markets, an ETF can provide some exposure. Currently, the iShares MSCI Frontier 100 ETF (NYSEMKT:FM) offers a way to invest in markets otherwise difficult to buy into.

5. Fees and commissions
These destroy the returns of many average investors because every dollar spent on fees and commissions is one you cannot invest. For large trades performed by major investors, fees here or there are usually a drop in the bucket compared to the total investment, but for average investors, a commission can be a much larger part of a total investment.

Although fees and commissions aren't completely avoidable, average investors can lessen their impact by making fewer trades, making a large enough investment that fees and commissions don't eat up a large percentage, and searching for a broker with lower trading costs.

It's still worth investing
Looking at the huge profits made by hedge funds and their managers, many average investors feel the odds are stacked against them. But by knowing where to look for good investment ideas and keeping realistic expectations, you can mitigate many of these disadvantages.

And if you're reading this figuring the big money has all the advantages, then you should brighten your day by reading about the five advantages you have in the market.

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Alexander MacLennan is long January 2015 $20 calls on Bank of America and long Bank of America Class B 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 Bank of America and Berkshire Hathaway. The Motley Fool owns shares of Bank of America and Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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