Retail investors, also known as individual investors, have certain advantages over indices and fund managers when it comes to outperforming the market.
Here are four of the main advantages that retail investors have:
Retail investors have the advantage of being able to wait for the right market conditions before investing. They are not required to be fully invested at all times, which means that they can sit out of the market during times of high volatility or uncertainty. This sit-out power allows them to wait for the right opportunities to invest, which can result in higher returns over the long-term.
Investing in the stock market can be compared to playing poker. You need to pay a certain amount of money to participate, just like in poker where you pay an ante or post blinds. However, unlike in poker where you must pay to see your cards from the deal, investors have the luxury of being able to observe and wait for the most opportune moment to invest without having to pay anything.
Investors can see the market's "cards" before making a move, free of charge. This is a great advantage, but unfortunately, few investors derive benefit out of it. Many investors try to involve themselves in every market movement, and as a result, they may end up making hasty and poorly informed investment decisions.
The key to successful investing is to be an exacting opportunist. Be selective and pick your entry spots very carefully. Wait until the probabilities are stacked in your favour before investing. By doing this, you can potentially outperform less disciplined and less capable market opponents and achieve long-term success in the stock market.
Retail investors are not bound by the bureaucratic processes of large funds with committee meetings, approvals, and other administrative hurdles. They can be much more agile and move quickly to take advantage of market opportunities. They can make investment decisions on their own, without having to wait for approval from a committee or board of directors. This agility can be a significant advantage when it comes to outperforming the market.
Retail investors have the advantage of being smaller than institutional investors. This means that they can enter and exit positions faster without worrying about impacting the price of the security they are trading. On the other hand, institutional investors have to deal with size and the impact costs that come with it. Retail investors do not have to worry about such impact costs, which gives them an advantage in the market.
Micro and small-cap investments
Retail investors can also operate and invest in micro and smallcap companies of market caps less than Rs. 5000 crores which fund investors may not be able to invest in due to size constraints. This provides them with access to unique investment opportunities that can generate higher returns. Retail investors can take advantage of undervalued or overlooked companies that may be too small for institutional investors to consider.
Retail investors can use these advantages to generate higher returns and take advantage of unique investment opportunities. However, it is important for retail investors to carefully consider the risks associated with their investments and to conduct proper due diligence before investing.
The author, Mr Jimeet Modi, is Founder & CEO of SAMCO Securities.