Welcome to Amateur Hour

If you're reading this article, chances are you're an amateur investor.

Whoa there! No need to get angry. I'm paying you a compliment. Sure, to most people, "amateur" has negative connotations -- it implies a lack of skill, a lack of commitment. But "amateur" comes from Latin via French; in its original form, it means "someone who really loves doing something."

That's a good thing, a powerful thing. Perhaps the best thing.

Professional, but at what price?
Here at The Motley Fool, we believe in the amateur investor. We're into investing because we enjoy it. We love the challenge of ferreting out winning investing ideas, and we love the freedom that comes from controlling our own finances, rather than trusting the job to a professional: someone who takes our money but whose true incentives may lie elsewhere.

As investing gurus like Peter Lynch, John Bogle, Warren Buffett, and others have explained, too many of Wall Street's professionals are conflicted, putting quick bucks and more clients ahead of serving those clients' best interests. Sure, these guys are professionals, but that just means they're interested in making money -- and not necessarily for you.

The amateur edge
Even if you find a perfectly honest asset manager (and there are some out there), it's important to remember this: We amateurs stand a good chance of beating the professionals. It's not because we're smarter, or faster, or even because we sport such an impressive summertime physique (why, thank you -- I have been working out).

It's because:

  • We're smaller. Remember when Buffett bragged that he could make 50% returns per year? The catch was that he'd have to manage $1 million, because smaller amounts of money enable us amateurs to invest in small companies the professionals can't touch.
  • We're independent. Woe unto the Wall Street professional trying to buy put-upon apparel maker Under Armour (NYSE: UA  ) these days, instead of plowing into pricey-but-fashionable commodity stocks. As independent amateurs, we don't have to take part in Wall Street's stock popularity contests.
  • We're patient. We amateurs don't need to worry about showing a gain next quarter in order to keep our "top trader" parking space. We're free to buy what looks cheap and hold it for the long term, while the poor professionals have to wait until someone sounds the market "all clear," something that only happens after stocks have made substantial returns.

And in the end, chasing the latest fashions -- getting into the market when prices are high, and getting out when they crash, as so many professionals are doing right now -- is a recipe for years of market underperformance.

We've seen this time and time again, especially in volatile small caps. Here are a few of the more than 120 small caps that wilted more than 15% between June and August last summer, only to come back with big returns thereafter.

Company

Original Drop

Return

Houston American Energy (Nasdaq: HUSA  )

(25.5%)

142.6%

International Coal Group (NYSE: ICO  )

(37.5%)

164.1%

Multi-Fineline Electronix (Nasdaq: MFLX  )

(40%)

158.5%

Olympic Steel (Nasdaq: ZEUS  )

(28.1%)

132.3%

Open Text (Nasdaq: OTEX  )

(20.8%)

72.1%

Adolor (Nasdaq: ADLR  )

(15.8%)

51.1%

*Screening and data from Capital IQ.

Sure, that kind of volatility can be scary, but there's opportunity in the frenzy -- which is why we spend so much time following stocks like these to find deals on the best small-cap companies out there.

Not so simple
Of course, you can't always count on rebounds in beaten-down small companies -- some are down for good reason. But right now, everything's down. Stocks are dropping 10% a day on no news at all. This market is throwing dozens of strong small caps under the bus as the professionals scramble to unload everything and wait out the storm.

It's one of those rare times when we can get great companies at unbelievable prices -- because the professionals care less about the value of the companies and more about not seeing red on their trading screens over the short term, lest their clients pull their money or their bosses cut their paychecks.

In other words: Welcome to amateur hour. This looks like the beginning of one of the greatest investing opportunities of the past half-decade. If you're not taking advantage of it, you just might have what it takes to be a professional -- but I hope not.

At Motley Fool Hidden Gems we're looking to capitalize on the professional meltdown by scouring the world of small caps for spectacular companies with great potential -- and low price tags. We present two new picks per month, plus updated best-buy guidance on our existing recommendations.

A 30-day free trial will give you access to all of our past picks -- and our best bets for new money now. Click here to get started -- there's no obligation to subscribe.

Seth Jayson is co-advisor at Motley Fool Hidden Gems. At the time of publication, he had no positions in any company mentioned here. Under Armour is a recommendation of Motley Fool Hidden Gems and Rule Breakers. The Motley Fool owns shares of Under Armour. International Coal is a Hidden Gems Pay Dirt selection. The Motley Fool has the most lovable set of investor-friendly disclosure policies in the biz.


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