The Traders Journal

Five Advantages Individual Investors Have Over Institutional Investors


The walls of advantage once held by institutional traders over individual investors have come crashing down.  Emerging from the dust, there now marches an entire army of real advantages that individual investors hold over their formerly superior big brothers.  

In the worlds of fundamental information, charting tools and trading costs, these institutional armies no longer have the high ground.  The field is indeed much more level. 

Despite all the talk about program trading, derivatives and flash crashes, I urge you not to become demoralized or dispirited.  Don’t tiptoe to the sidelines.  My objective here is to increase your overall personal satisfaction with your individual investing efforts while bolstering your confidence and stimulating a call to action.  There are dozens of actual advantages that we, as individual investors, have over institutional investors.  I want to share five that come to mind.

1.    In today’s internet age, information is delivered to you at lightning speeds if you harness the power of triggers and alerts offered by most major brokerage houses and delivered via text or email.  

2.    One-minute data combined with the on balance volume indicator makes it virtually impossible these days for “Mr. Big Institution” to either accumulate or distribute an equity sight unseen behind the curtain.  His true intentions can be made transparent to those individual investors who know how to track them.

3.    An individual investor’s accounts are always a work in progress.  Fortunately, these days we have professional-grade tools at our disposal.  Instruments like Morningstar’s X-ray portfolio tool can perform a virtual MRI on all our holdings.  It unbundles all our ETFs, mutual funds and equities, thereby exposing the true composition of our portfolios.  A partial list of examples includes the following:
     a.    Allocations by percentage in cash versus stock, foreign equities and others.
     b.    Style descriptions amongst value, core and growth, as well as segmentation by size for large, mid or      small cap stocks.
     c.    Segment holdings by credit quality and interest rate sensitivity.
     d.    Segment holdings in the key cyclical, defensive or interest sensitive sectors.
     e.    Details of your holdings in percentages by stock types, such as distressed, high yield, speculative      growth, etc.
     f.    World regions highlighted with specific exposures to foreign markets.
     g.    Fees and expenses associated with your ETF and mutual fund holdings.
4.    We individual investors are driving virtual sports cars racing against the battleships that are institutional money managers.  Our trades don’t need to go to committees, our trades won’t move the market (unless you’re trading penny stocks which you should avoid), and we have a passionate stake in our accounts which no hired hand will ever have.

5.    Only we ourselves can provide the sort of emotional profits of say, investing with a CEO we admire and whose business practices align with our own, assuming just the appropriate amount of risk for our family, personality and present situation or divesting of certain types of companies and industries that don’t suit our vision of the future and our planet.  Only individual investing can accurately yield these personal emotional profits.

The bottom-line is that as an individual investor, you should be positive, be action-oriented and be a believer.  Not only is it a level playing field, but these days, with some skill and discipline, you can achieve investing from a higher ground than the institutions.

Trade well; trade with discipline!
-- Gatis Roze

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Gatis Roze
About the authors: , CMT, holds an MBA from the Stanford Graduate School of Business and is a past president of the Technical Securities Analysts Association (TSAA). He is also the co-author of Tensile Trading: The 10 Essential Stages of Stock Market Mastery (Wiley, 2016). A full-time investor for over 25 years, Gatis has taught sold-out investment courses throughout the Pacific Northwest and beyond since 2000. Learn More

Grayson Roze
is the author of Trading for Dummies (Wiley, 2017) and Tensile Trading: The 10 Essential Stages of Stock Market Mastery (Wiley, 2016). He has worked in the financial services industry for since 2012, and now serves as the Business Manager for the company. He holds a Bachelor's degree from Swarthmore College. Learn More
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Great topic. Smaller investors have advantages, but size is most prominent. Except for the size factor, the variables you list imo aren't advantages individuals have over institutions, but rather advantages that institutions used to have, but have recently been leveled, to some degree. 1.) Access to technology. The cloud has evened the playing field here the last 5 yrs, but individuals dont have an inherent advantage over larger investors here. 2.) Institutions' inability to hide orders...This can allow small players to front-run...which can be an advantage for the individual/arb. This is a major problem, as outlined in Flash Boys. 3.) Same point about technology. Ubiquity of advanced financial tools levels the playing field...but anything an individual can buy, so can Fidelity PM's. 4.) Race cars vs. Battleships. 100% True. Smaller funds consistently outperform larger funds. 5.) Emotional ties/psychological ties. In my experience, when this factor exists at all (obviously anecdotal and difficult to measure), it's a negative for performance. The challenge is to take this inherent disadvantage and neutralize it. I've never seen anyone generate alpha because they "cared more". Good article thanks for the thoughts it provoked!
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