When a money manager with a 10-year track record of 18% annual returns tells you that you have a huge advantage over most investors, you sit up and take notice. At least, that's what I did when D3 Family Funds head David Nierenberg asserted this in a presentation the other day.

His point: The market is full of dumb money and, furthermore, that dumb money is ignoring the stocks with the most profit potential.

Individual investors like you and me, on the other hand, can take our time to thoroughly research the very best stocks on the market and grab the stocks with the most potential.

Ooh la la, tell me more
Nierenberg's D3 firm specializes in micro-cap investing. Back when they got started a decade ago, Nierenberg figured they could research their way to an informational advantage on stocks capitalized at $500 million or less.

Today, given that Wall Street is covering fewer companies and that the coverage they do provide, in Nierenberg's opinion, lacks depth, he feels that D3 can gain an informational advantage on stocks capitalized up to $1 billion. In other words, as long as you're willing to do your own legwork, you can beat the Street without taking on extraordinary risk or speculating on fly-by-night operations.

And that, dear Fools, is good news
Why is this so? First, remember why Wall Street does research at all. They're selling their work to large institutional clients. These clients have neither the time nor the inclination to read lengthy reports about obscure companies. That's why you see 20 or more analysts covering the General Electrics and Googles (NASDAQ:GOOG) and just three walking the beat of D3 pick Pediatric Services of America.

Moreover, consider the recent ETF boom. These are the increasingly specialized index funds that otherwise act just like stocks. The benefit to investors is that they tend to be low cost, offer immediate diversification, and allow one to make broad sector calls rather than individual stock picks. So folks needn't worry about researching the squishy traits -- such as management integrity -- that can sink even huge companies such as, oh, I don't know, Tyco International.

Now don't get me wrong. Those are serious benefits, which is why ETF assets under management have grown 40% since December 2005 and now add up to more than $422 billion, according to the Investment Company Institute.

That's loser money
Of course, every dollar that goes the ETF route is a dollar that didn't bother researching individual stocks.

Let's suppose, for example, we conclude that demographic trends point to a raging bull market in health care just a few years out. To act on that theory, the ETF investor might buy Dow Jones U.S. Healthcare (IYH). This ETF counts biggies such as Johnson & Johnson (NYSE:JNJ), Wyeth (NYSE:WYE), Amgen (NASDAQ:AMGN), UnitedHealth (NYSE:UNH), Medtronic (NYSE:MDT), and Bristol-Myers Squibb (NYSE:BMY) among its top 10 holdings.

So the ETF investor went whole hog and has all of his or her bases covered.

Realize, however, that the ETF investor has done nothing more than make a sector call. He or she bought IYH without any regard for the valuation, quality of management, competitive advantage, or drug pipeline of the underlying companies.

That's where your opportunity lies. You should be able to smash the ETFs returns if you have the time, inclination, and skill to pick the very best-performers of the bunch.

Your tremendous upside potential
While this is no simple undertaking, it can be done. And with more and more folks ignoring individual stocks, there's more opportunity to do so than ever before. It just takes:

  1. Time
  2. Patience
  3. A willingness to work

This huge advantage for the individual investor is even more pronounced when it comes to small caps. Not only are small caps the best-performing stocks historically, they're also presently the most ignored. That's why Nierenberg focuses exclusively on small caps at D3, and why we focus exclusively on small caps at Motley Fool Hidden Gems.

The current market environment makes today a fantastic day to get started in becoming a master small-cap investor. We can help you do so at Hidden Gems -- because in addition to recommending two market-beating small caps each month, we teach you how to find great small caps on your own. You can try out the service free for 30 days with no obligation to subscribe. Just click here for more information.

Tim Hanson does not own shares of any company mentioned. Tyco and UnitedHealth are Motley Fool Inside Value recommendations. Johnson & Johnson is an Income Investor pick. UnitedHealth is also a Stock Advisor selection. The Motley Fool has a disclosure policy.