Most investors do not realise, but as a private investor managing his own money, he has got an immense
advantage over a fund manager due to factors he may not even be aware
of.
Sure it will take up some of your free
time but it will probably be one of the most awarding activities you
can invest your time in.
We have all worked hard for the money
we have saved and it would only be prudent to invest in in the best
way possible.
With public pension systems crumbling
around the world because of ageing populations, making the most of
your savings had gotten much more important.
Below are the advantage I have come up
with. If you have any to add send me a short note by replying to this
email.
1. You can wait
As a private investor you can wait for
attractive investment opportunities to present themselves. If you
cannot find anything attractive you can stay in cash.
Fund managers do not have this luxury.
They have to invest in whatever their investment area is irrespective
of valuation.
Holding cash in the fund management
world is known as career risk as the fund manager runs the risk of
falling behind his peers or his benchmark. The larger the cash
position the higher the career risk.
The best example of career risk I have
read is value fund managers losing their jobs because they refused to
buy internet shares during the internet bubble.
2. You can invest anywhere and
everywhere
As a private investor you can invest in
any type of asset in any country that offers an attractive risk
return trade-off, be it corporate bonds, equities, options, real
estate etc.
Fund managers have to stay within the
fund's investment area. Additionally complying with regulations, even
further limits their investment choices.
You can argue that you can change to a
fund in another investment area but that is also actively managing
your money.
3. You can invest in any size
This is similar to the investing
anywhere and everywhere as you have the freedom of investing in small
or large companies whatever is most attractively priced.
I was recently astounded when I heard
of a value fund manager that had to invest in companies that have a
high weighting in a particular share index because he had
institutional investors (read large investors) that would withdraw
their funds should his performance deviate too much from the market.
This is ludicrous, why invest with a
value manager if you really want market index performance? You want a
value manager to do what he does best, search for undervalued
companies.
4. You have no benchmark
As a private investor I only have one
goal in mind, to grow my investment portfolio each year irrespective
of what the market does.
Call me conservative but I do not consider it a good year if I
have lost 25% while the market has lost 40%.
I am sure your goal is the same.
Fund managers only have one goal,
beating his benchmark irrespective of absolute return. I cannot
remember how many times I have heard a fund manager say that he has
to remain fully invested in his investment area as that is what his
investors expect of him.
Just think of what happened to
investors in technology funds as the internet bubble deflated.
5. You can focus and ignore
Studying, understanding and applying
what has worked in investing is all you need to do to be wildly
successful as a private investor.
You can only focus on a few things and
ignore the market noise, you only have to spend relatively little
time to be successful.
Fund managers have to have an opinion
on a lot of different investment areas because they have to appear
competent in company and client meetings. It is tough for them to
have to say I do not know.
I do not watch financial television,
its complete rubbish and a waste of time. Mainly yo-yo news i.e. what
went up and down.
I have my investment criteria, I look
for companies that falls within it and I study only that. The rest
does not interest me and that saves a lot of time.
6. No conflict of interest
This is a big one. You only have your
best interests at heart. In other words all your decisions are in
your best interest.
Fund managers have to think of keeping
their jobs, increasing their assets under management and keeping
clients happy.
All this means is that their investment
performance is not the most important thing on their minds.
Also fund managers in companies what
also offer investment banking services may be pressurised to buy
securities of investment banking clients irrespective of investment
attractiveness.
7. You can have a long view
According to a study by the New York
Stock Exchange the average holding period of shares held by investors
have declined from five to six years in the 1950's to 11 months.
That means that the average investor
has an investment horizon shorter than one financial year.
It is unlikely that a company with
problems, as undervalued investment inevitably have, can sort them
out in such a short period of time.
As a private investor you can follow
the company over many years and realise the gains when the company
gets revalued by the market.
This may be the biggest competitive
advantage you have. The ability to look at a company solely on
valuation and keep it as long as it is undervalued.
8. No peer pressure
Accept if you discuss your investment
with friends or family you will have no peer pressure to buy or sell
any investments.
I have gotten to the point that I am
reluctant to discuss my investments because the response I get is
either, “never heard of it” or “what, you must be mad, don't
you read the newspaper?”
Fund managers have a different problem.
The funds they manage get compared to benchmark indices and other
funds, including the individual fund holdings. Should you stand out
in any way invites questions. Should the performance be worse than
the peer group or benchmark career risk increases.
If you manage your own money you have
none of these problems.
9. You decide
You make the final decision after you
have done the analysis. You may be wrong but at least you make the
calls either way.
A lot of funds are managed where
committees decide what is bought and sold. Apart from the problems of
group-think investment committees are staffed with people throughout
the organisation with different investment approaches, not all of
which has shown good historical results.
Furthermore it may be difficult to tell
your boss that his investment idea stinks if you have your bonus
evaluation later that day.
This leads to suboptimal and sometimes
completely dysfunctional decision making.
10. You can concentrate
If you find a really compelling idea
you can choose to invest as large a part of your capital as you feel
comfortable with.
With 80% of non-market risk diversified
away with as few as 15 positions you can determine what your optimal
number of investments are.
Mine is 30 as I feel comfortable with
the weighting of each position in my portfolio and I can easily keep
track of the investments.
When I see funds with 100 or more
investments my first thoughts are that they must not have much
conviction in any of their ideas.
Also with so many positions you may as
well buy the market itself through an inexpensive exchange traded
fund.
11. You control the costs
Controlling costs and fees, or the
friction of investing, is a very important part of part of realising
superior long term results.
Using a discount broker I can buy and
sell most shares for around 1% brokerage. If I hold a position for
three years that equates to 0.33% per year plus a 0.25% custody fee.
That is a lot lower than funds that
charge 1% to 1.5% per year on top of a 5% initial fee and other
expenses.
Calculated over a period of 20 to 30
years keeping costs low makes a huge difference.
12. Down years are more bearable
This goes along with the point on
making your own decisions.
Should you have a bad year at least you
know you made the decisions, can learn from your mistakes and make
adjustments to your investment strategy.
Maybe its just me but I prefer making my own mistakes with my money rather than let someone else experiment with it.
13. You can be fully invested
Should you find a large number of
attractive investments you can be fully invested and remain so even
if the markets declined and you are still convinced of the investment
case of each investment.
With a fund manager this is
unfortunately not the case. When markets fall they are bound to get
redemptions. In order meet the redemptions they must either have cash
available or sell investments.
But when markets are falling liquidity
drops as well. That means that because investments have to be sold
liquid investments are sold first. This selling pressure puts
pressure on share prices leading the markets to fall further thus
triggering more redemptions. You get the picture.
Some fund managers plan for such
eventualities be keeping a certain amount of liquid investments or by
keeping at least a small amount of cash on hand.
This as mentioned in one of the points
above leads to suboptimal investments not necessarily the managers
best ideas.
Luckily as a private investor you do
not have this problem.
I always keep a cash reserve of one
years living expenses aside to ensure that I do not have any pressure
to sell investments should the market decline unexpectedly.
Also a large cash reserve gives me the
peace of mind and opportunity to focus on investing for the long
term.
There are of course a few funds where
the drawbacks mentioned above do not apply but they are in the
minority. The large bulk of fund management companies are focused on
growing the amount of money they manage, where maximising the returns
to investors come a distant last.
I am usually not too focused on the
larger economic developments. But what has struck me recently is the
disconnect between economic data and the stock market.
I know the stock market leads the
economy by six months or more but at the moment it looks like the
stock market knows something the economy doesn't.
With the market up substantially from
its lows and real economic indicators hitting new lows something has
to give.
With unemployment increasing and and
leading employment indicators like hours worked and temporary
employment not improving I am thinking the stock market is the one
likely to give.
Your scratching his head analyst
Tim du Toit
