“It’s not the size of the dog in the fight, it’s the size of the fight in the dog.” – Mark Twain
In this corner, stands Average Joe Investor. He travels light, accompanied only by his spouse and maybe a couple of kids. As far as market muscle goes, he invests a few thousand bucks here and there. He knows the difference between a jab and an uppercut, but is not highly trained or skilled in either “sweet science” – boxing or investing. He has high hopes of taking home the “purse” in 2007, but deep down suspects he may be overmatched.
Standing in the opposite corner is Average Institutional Investor. He customarily brings millions to the table. He’s been training for 2007 for years. He has software up the wazoo, along with an entourage of researchers and market analysts. He can tell you what the market did two years ago, two months ago, two days ago, and two seconds ago.
You, my friend, are the 90-pound weakling in this scenario. As an investor, you go up against the heavyweight institutional guys every day. How can you possibly stand a chance against them? They have the skills, training, resources, and money.
You’re lucky if you leave the ring with your shorts on, right?
You’d think so. Yet we know that institutional investors don’t always do so well. We’ve seen hedge funds fail spectacularly. And we’ve heard of individuals who somehow do very well, despite the apparent long odds. What could be in their toolboxes that allows them to match up with the big boys? I’m willing to bet it’s not anything you don’t have. But if you’re unaware of the advantages, you’re denying yourself a fighting chance in the marketplace.
If you want to make more money this year than ever before, you need to start using these three tools.
1. Long-term outlook
I read a study showing that people have trouble investing beyond a three-year outlook. So if you know there’s going to be, let’s say, a water shortage in two or three years, you’d be inclined to invest in the water industry now. But you wouldn’t be so inclined if the shortage will occur in four years. It’s only one study, and more research needs to be done on the subject, but it does have the ring of truth.
For hedge funds, three years is an eternity. These “happy-go-lucky” funds aren’t as opportunistic as you think. Most get three months, at best, to show a profit. If they’ve lined up a sure thing that isn’t expected to pop for six months, forget it. They’re on the outside looking in.
Not you, though. You can and should invest for the long term. Even confirmed traders and speculators should balance out their portfolios with long-term investments.
The only qualification you need to invest for the long term is a willingness to wait.
For example, I know a gas company that committed to some unwise hedges several years ago. But these hedges come off the books in 2008. And when they do, the company’s earnings are sure to spike. I recommended investing in this company back in 2005, when it was dirt cheap because investors weren’t willing to wait until 2008 to see their investment pay off, even if the payoff was big. Those who took my advice got an amazing bargain that hedge funds couldn’t touch, no matter how much they wanted to.
2. Thinking small
With your thousands, you can invest in companies that would be too small for institutional holders with their millions (or billions). These largely undiscovered companies aren’t on the radar screens of major investors, and they usually have few, if any, analysts covering them. So their prices haven’t been bid up by the big boys. Thus, you can be one of the early investors who get in while the price is low … and then enjoy the ride up the charts.
These companies may have a less notable track record than their larger peers. Many have been around for at least two years, yet remain too small for many institutional investors. Evaluate them as you would any other company, and invest if everything looks good.
Once they get big enough, analysts will start tracking them and the institutional guys will eventually jump on board. When that happens, their share prices will start to surge.
3. Deep research
Thanks to the Internet, you can learn plenty about a company in a matter of hours. Basically, the same information that is available to professional analysts is a click or two within your reach.
Okay, many institutional investors actually visit companies that catch their eye. They get invited as part of a group or they come alone. Warren Buffett and his colleagues get to know the leaders of a company up close and personal. And when I’m researching a company, I talk to its CEO and/or other high-level execs.
While you don’t normally have the same level of access as some pros, you’re a telephone call or e-mail message away from communicating with any company’s investment office. You can read the annual reports, quarterly reports, and SEC filings. You can listen to earnings teleconferences and go to shareholder meetings.
I love uncovering the dirty little secrets of a company, but that’s just me. Doing all this research may not be your cup of tea – but it’s important for you to know that you can do it. And doing at least some digging is as easy as pie.
In fact, if you invest in just a handful of companies rather than the dozens that analysts often have to follow, you have the opportunity to get to know those companies better than the analysts. It takes only a little time, effort, and skill to get the lowdown. The advantage is yours … if you want to take it.
It’s also not impossible to beat the big boys on their own turf – to rush your money in and out of trades, speculate on small price movements, and leverage your money with option trading … as long as you’re experienced and very good at what you do.
Don’t just assume that institutional investors hold all the cards and you hold none. Not only is it not true, it could prevent you from appreciating strategies where the investment opportunities play to your strengths and thus increase your chances of doing just as well, if not better, than the professionals with the quick jab and monster uppercut.[Ed. Note: Andrew Gordon, ETR’s financial expert, is the editor of our new investment service, INCOME. Each month, he uncovers specific stocks that promise safety (first and foremost), along with much-higher-than-average profit potential.
The above article originally appeared in ETR’s Investor’s Daily Edge.