Warren Buffett pointed out that small investors can play their advantages to outperform huge investment accounts! Those advantages include return, size, growth, liquidity, pecking order and new listing opportunities unavailable to large accounts. By using these advantages, small investors can outperform huge investment accounts!
Do small investors have advantages?
Choices To Make Money Work course 215 lesson 4, answers the question, do small investors have any advantages? At the end of the lesson, links to related content help you learn more.
What you learn:
Learn the advantages small investors have over huge investment accounts. So you can learn to use and apply those advantages to your investing to improve performance. Make Warren Buffett jealous by putting better returns into your portfolio!
Each investment matters
Each investment can make a difference. You can learn how to begin playing your investing advantages with this lesson. Investing becomes a numbers game when you or Warren Buffett are considering an investment opportunity. The opportunity must offer difference making potential to a portfolio. That means it must have impact on your bottom line. It must make you money.
For this discussion, about how small investor advantages can produce better returns, we set aside any consideration for diversification or safety. But just for now. We cover the why, how and where of diversification and safety in other lessons.
Warren Buffett & small investor advantages
1. Big return difference
2. Oh yes! Size matters!
3. Faster growth numbers
4. Liquidity advantage
5. Play pecking order
6. New listings and startups
When you look at a prospective investment you need to know you have good odds of making a reasonable return. The possible investment worth of the portfolio must increase by a meaningful amount. When the potential returns are too small, it is simply not worth considering the investment.
A $1,000 investment realizing a 25% return, sounds like a good solid result. That $250 return is particularly good if $1,000 is the entire portfolio! Under normal circumstances, a 25% return is excellent!
However, if that $1,000 investment is part of a $1,000,000 portfolio, the $250 gain increases the total account by 0.0025%! Not much! And certainly not worth making. That return is like earning a quarter ($0.25) in a $1000 portfolio, or a return of $1 on a $4,000 portfolio. Such returns are so small that the gain is meaningless.
The challenge of the huge portfolio
When the portfolio is huge, investment size presents a challenge. In relative terms, small investments can not work for very large portfolios. Huge funds need big results from big investments to produce acceptable returns and meaningful growth. A multiple billion dollar portfolio needs gains from very big investment positions to make any real difference.
So like Mr. Buffett, before we invest, potential return numbers must show reasonable gains. To do so, managers of huge portfolios certainly face the very tough challenge of producing consistent and meaningful growth.
That gives us small players an important advantage. Remember, small is relative. In investing scale, small still includes portfolios holding many millions. So even beginners starting with a small stash are keeping some very good company!
Oh yes, investor! Size matters!
For a little context, small companies in U.S. markets are those under $1 billion in market capitalization!
Market capitalization of a company is the price of a share times the total number of shares outstanding. For example, a company with 100 million shares issued, that trades at $20 per share, has a market capitalization of 100,000,000 X $20 = $2,000,000,000!
That’s 9 zeros after the 2; that’s $2 billion! Lots of money, but in the stock market, our example company sits at the lower end of the large company list!
Now consider the dilemma of an investment manager running a company worth many billions. They must find and make big investments in very big companies to produce good investment outcomes.
Warren Buffett manages a giant company of huge value. His company, Berkshire Hathaway usually sits in the middle of the list of the top 10 largest companies by capitalization.
Small investors can beat huge funds
With over $300 billion, as Warren Buffett has in the value of his Berkshire Hathaway, he can not consider small investments in small companies. Mr. Buffett seeks big plays in very big companies. He has to find and go huge in huge companies or pass the investment opportunity.
Such a problem, investing $330 billion! He can’t consider many excellent investment opportunities that are available to us! Imagine, our investment advantage over Warren Buffett! In fact size gives us a very distinct advantage! In practical terms this means we have no huge players pushing up prices and sucking up all the shares of companies that we want.
That leaves us many more investment opportunities to pick from! It also means that we can search the huge pool of companies for spectacular performers and rapidly growing opportunities. Such companies are far too small for Mr. Buffett to consider. He must pass and leave them for us!
As smaller investors, we can consider all companies from the largest that he may consider, to those that rank as less than huge and all the way down to the smallest venture companies that may prove to be big winners. Providing the a company meets our investment criteria, we can feast on the shares while the big investment funds must pass them by or even better, buy them from us when they grow into big companies!
This reality of small and large account management, lets us grow to become big fish in our own little pond. And we can freely hop from pond to pond or market to market around the world. Our size gives us great financial flexibility the huge players can not have!
Faster growth for bigger returns
Another aspect of the financial numbers also works very well for us. Growing a company from a $10 million to $20 million or even $100 million to $200 million is easier than doubling the size of multiple billion dollar behemoths.
Also, smaller company growth can, and often does, happen relatively fast. Presuming that we do our homework and buy quality growing companies, the effect on our portfolios can be dramatic. We can grow far faster than any index. It requires risk management and homework, but it can be done well.
Among rapidly growing companies, as the size increases the rate of growth most often slows. This is the simple challenge of keeping all the complex parts of a growing enterprise working well together as it gets significantly larger.
These comments are guidelines, not absolutes. However, in this context, the odds favor us. Riding growth gives us a way to handily outperform not only the market indexes but outpace managers of monster sized funds as well.
More small investor advantages
This time, more small investor advantages include liquidity, investing market pecking order and the possibilities of new opportunities unavailable to large accounts.
Those advantages include the edge in liquidity, playing the stock market pecking order and new investment opportunities, all unavailable to large accounts. Investors can play the smaller end of the market for big profits. Be aware, those big profits get earned by taking risks.
Unless you know what you are doing, stay away! The payoff is big for investors with knowledge and experience. You can learn this end of the market. But doing so takes time and much effort. Triflers and gamblers regularly lose playing here, knowledge and experience wins most often.
Investors need liquidity To buy or sell well
Anyone that has sold a house knows it takes some time to find the buyer. Then that buyer must produce the funds. They often face a liquidity challenge. To get the money most people borrow to close on the sale of a house.
In the stock market, as long as we find willing buyers and sellers, most transactions take milliseconds. In the normal trade there is no liquidity issue.
But the sheer size of huge buyers that need huge positions, challenges buyers that need huge positions worth $100’s of millions or billions. They need an equally huge seller which puts them in a considerably smaller pool of investors than what we can readily access at will.
For us buying or selling even a $1 million position in widely owned and large established company can happen in a second. When we move down the size scale things change. The trading volumes and size of positions rapidly decline. Executing well in that situation requires knowledge and experience. The good news is that you can learn to do it well. It is one of more small investor advantages!
Investors can play the market pecking order
Each investment community, market and nation has unique characteristics. Knowing specific markets and their differences, lets investors use knowledge to reap profit!
Day after day experienced investors see clumsy buying and selling blunders that cost investors. It is not just small investor that make these costly mistakes. Large funds with unaccountable managements are the greatest offenders. Use this as a one more of the small investor advantages.
Big profits in small prices, companies and exchanges
Generally speaking, small companies listed on small exchanges, generally attract lower prices. When they grow to a certain level they can move up to more “senior” exchanges. The larger exchanges have much larger investment communities and far greater access to capital.
This can and does affect the share price. Without the big buyers, smaller players set the prices lower as a normal function of market activity. Small numbers of players and dollars produce lower prices.
Companies moving on up to larger exchanges, increase shareholder value by simply making that move. To be accepted on the larger exchanges, the companies must show growth. That often works well for small shareholders. The value increases can be fast and dramatic! Another one of the more small investor advantages!
Knowing this pattern we can go along for a profitable ride. Buy the stock of rapidly growing companies, listed on junior exchanges. Then take the gains in share value as they grow and attract more investors.
Finally, another of the more small investor advantages! Enjoy another nice bump up in price when stocks move up to senior exchanges. And good for us there is often more to come for growing companies. Once they reach a certain size, larger funds become interested in the growth story. When growing companies become large enough to attract institutional fund managers, their need for large investment positions can yet again significantly bump the share price.
Big players also attract one another. That process all contributes to giving smaller investors that bought in early, some very nice paydays not available to huge fund managers!
New listings offer big risks and rewards
New listing and startup investing are distinctly different from each other. They are also distinctly different from other types of investing. Each are special areas of high risks that can offer high potential rewards.
But often not! As a rule to thumb, if you do not know the type of company, the market and the circumstances well, give IPOs a pass. Most do not produce good returns for most small investors.
This can be a very profitable area to play. But to play well takes more knowledge, skill and experience than other areas of investing. Small caps, companies with small total capitalization of total market value, are a particularly special subset. Know what you are doing first, but it can be played as another of the more small investor advantages!
Seeing smoke, mirrors, frogs and princes
Institutional and most large investors do not play in the small new listing market. This is one place where small players are king. But play poorly here, and you can soon become a popper. There are many frogs, few princes and endless presentations that involve smoke and mirrors.
Yes, they might find gold in them there hills, but most likely it will not end up in your pocket! Why are such companies offered? This is an area of exceptional profit for dealers and brokers. They make a financial killing on this stuff!
However this soon gets beyond the scope of a beginner. We look at many details in future posts. For now just know that some excellent and very lucrative plays are possible. By very carefully selecting startups this approach can work very well. Risks are high and need managing. When you are just beginning to invest this is definitely not something you should try alone.
Do your homework, bring your common sense and when it sounds too good to be true, you are right! Pass, and you will be safe.
Do small investors have advantages? Answered!
Knowing and using the small investor advantages over huge investment funds can increase your wealth. Learn those small investor advantages so you can use and apply them to improve performance and make Warren Buffett jealous by putting better returns into your portfolio!
Lesson takeaways,
Small investors have advantages
Warren Buffett pointed out that small investors can ply their advantages to outperform huge investment accounts! Those advantages include return, size, growth, liquidity, pecking order and new listing opportunities unavailable to large accounts. By using these advantages, small investors can outperform huge investment accounts!
- Small investors can achieve big return differences.
- Small investors have a size advantage.
- Faster growth numbers are available to small investors.
- Size gives small investors a liquidity advantage.
- Small investors can play their pecking order advantage.
- Small new listings are not available to the huge funds.
- More small investor advantages can improve returns.
- Small investors can play their liquidity and size advantage.
- Small investors can learn and play the market pecking order.
- Smaller listing can offer small investors excellent returns.
- New listing and startup investing must be approached with care.
- Distinguish between smoke, mirrors, frogs and princes to invest well.
- Superior investors always do their homework.
Other lessons related to:
Small investors have advantages
Optimism and unrealistic investor minds
Attached stubborn helpless investor
Weeding your investment portfolio
High frequency trading explained
Bernanke billions save trillions
Research confirms your investment holdings count
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Choices To Make Money Work:
Key investing success choices Lesson 215.01
Join exceptional wealth builders Lesson 215.02
Investing time or adviser time? Lesson 215.03
Small investors have advantages Lesson 215.04
4 Successful investor traits Lesson 215.05
Avoid 6 investing sins Lesson 215.06
Investment impatience destroys wealth Lesson 215.07
3 Yeses or no investment Lesson 215.08
Investing can be fun, interesting and slow Lesson 215.09
Warren Buffett explains gold Lesson 215.10
Next course 215 lesson 5:
4 Successful investor traits
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