Most financial advisers repeat the mantra that only "experts" can succeed in investing. Ordinary mortals just can't do it, they claim, and here are the studies to prove it!
True, most investors and actively managed funds don't beat the indexes. But nothing in those studies says that you can't outperform the markets -- if you make the effort. Aside from investment capital, all it takes is an investment of time and attention. Most people won't make that investment, or they believe the industry chant that individuals can't succeed on their own.
If you fall in one of those categories, stop reading now. Your only concern is how to find a good adviser or broker, one of the few who cares as much about making money for you as they do about lining their own pockets. Good luck.
For the rest, let's look at why you can beat the markets despite what the experts claim.
It's harder for "big money" and "Wall Street insiders" to beat the markets
Say what? Don't they get all the hot tips, the best research, the private meetings with CEOs, and all those other goodies? Sure. But those don't help much. If they did, most big funds would beat the indexes by a mile every year. As the hard numbers clearly show, they don't.
It's much harder to manage $100 million than $100,000. For a fund manager to take a 1% portfolio position in a stock, he has to buy $1 million in shares. That's 20,000 shares of a liquid $50 stock like Citigroup (NYSE:C) or Wal-Mart (NYSE:WMT). But buying or selling 100,000 shares of a $10 stock like National Bank of Greece (NYSE:NBG) can be hard. And committee-imposed rules at many fund companies ensure that fund managers aren't even allowed to consider many of the $5-$10 small-cap stocks that provide the best returns over time.
Imagine the obstacles a billion-dollar fund manager faces. Bill Miller's 15-year streak beating the markets with his huge Legg Mason Value (FUND:LMVTX) fund was an amazing achievement. Your task is much easier.
You can invest in any stock you like, U.S. or foreign. You can buy 100 shares, or a few thousand, without causing a ripple in the market, and sell out just as easily. You have agility and freedom that fund managers only dream about.
You don't have to be 100% invested in stocks all the time
A few funds let their managers decide how much cash to hold, or when to offset their equity holdings with bonds or short positions. But most managers have a mandate to stay at least 95% long in stocks, often in a particular category or market-cap class. Most fund managers have nowhere to hide when the market goes south.
You can decide to do anything you like -- stay 100% invested (which I do most of the time), step aside if you're pessimistic, diversify across sectors or around the world, whatever.
Most importantly, you don't have to follow the herd. Fund managers do. They get in trouble for buying stocks that their research departments don't cover. Many are forbidden to do so. But no one ever got fired for buying IBM (NYSE:IBM) and Microsoft, because everyone does it.
The creativity and "looking under the radar" that you find in the few top-performing funds are actively discouraged by most of the industry. And as Margaret Thatcher once said, the problem with staying in the middle of the road is that you tend to get run over. The "little guy" can play his own game way off the beaten track.
The playing field is level
You can get almost all the information you need to invest successfully without brokers or analysts. The new fair disclosure laws (Reg FD) ensure that companies release material information to everyone, not just their favorite analysts. The Sarbanes-Oxley law makes CEOs and CFOs personally accountable for the accuracy of SEC filings and quarterly reports -- another plus for the little guy. These measures won't end fraud and favoritism completely, but the combination should make a serious dent in the problem - and help the little guy compete on a more even playing field.
If you never read quarterly earnings reports or SEC filings (or you do, but you don't understand much, and can't be bothered to learn), you should avoid picking stocks yourself. But there's no reason why individual investors can't get to know their investments in depth. Maybe not as well as the CEO, or a full-time analyst following the company, but enough to know what they do, whether they do it well, whether they're likely to stumble, and whether they're building shareholder value for the future.
The average fund manager with $100 million or more probably holds more than 100 stocks, far more than any one person can easily follow. He relies on the analysts in his firm to tell him when to buy and sell much of the time. We know how effective their calls are.
You can do it
To sum up, no one said successful investing was easy. If it were, everyone would do it, and like Lake Wobegon, everyone would be above average. That can't happen in the markets, by definition. Most folks will plod along with average or subpar returns, made worse by fees, commissions, and taxes.
You don't have to be part of that herd. I started investing with a small part of our total net worth; once I thought I knew what I was doing (which I really didn't, at that point) I fired our broker and invested all of our stock market funds myself. Two years later, I beat the S&P 500 by a mile, and went on to put together an eight-year streak of beating the markets through 2006.
You can, too. Invest your time and attention, and the rewards will come. As the old saying goes, "Can't never could!"
Microsoft and Wal-Mart are Motley Fool Inside Value recommendations. Try any of our investing services free for 30 days.
Fool contributor Dale Baker, a private client portfolio manager, owns shares in National Bank of Greece for himself. He ignores most of what the "experts" say can't be done, and welcomes your questions or comments at [email protected]. The Fool has a disclosure policy.
