It’s ironic I’m writing my first wire to outline techniques you can use to beat professional fund managers. The fact is, most people assume that professional fund managers have an informational edge over everyday investors. This isn’t true.
These days public information is so widely available and accessible that seeking out detailed information on any listed company isn’t that hard.
Some think fundies have access to meet with company management which gives them an additional informational advantage. This is true only to an extent. The edge is in the ability of fundies to eyeball CEOs and get a sense of the qualitative aspects imperative to a successful business, like culture. But that aside, from an information perspective, these days transcripts of analyst calls can be easily found online. Even if there are meetings, CEOs will always tow the company line and tell fundies what the market already knows.
The only other advantage fundies have isn’t informational. It’s time. They have time to dig out the information because it’s their full time job. But you’ll be pleased to know that there is a finite set of information available. Just because they spend 10 times more hours researching a company doesn’t necessarily mean they have 10 times the advantage over you. There’s only so much relevant information available. At the end of the day, one person still has to synthesise it all and make a call.
As long as you dedicate the appropriate time to turning over the rocks, you can do just as well as us fundies.
Assuming you have the time and patience to do this, here are 3 ways you can beat the fundies at their own game:
1. Ignore the noise and seek out the true source of information
Focus on facts first. Don’t get distracted by macro themes and economic forecasts. Forecasts and thematic investing make for great newspaper reading, but they aren’t factual. It’s based ultimately on others’ opinions. The closer you can get to the true source of information, the better quality information you’ll have to make decisions. You are investing in stocks after all, not economies. And if you look hard enough, you can always find companies that will grow through all types of economic environments.
So instead of reading others’ opinions, your time is better spent understanding a company. What are its business lines? What products do they offer? Who are their customers? What advantage do they have over their competitors? You can find this all online. Start with the current annual report. Then go back historically to see if management have delivered on its original plans. Management presentations, substantial shareholders lists, remuneration and KPI information should all be available on a company’s website. If you find the details about the firm’s activities too complicated, you should move on to the next company.
Social media platforms can be a great source of customer information. Check feedback from customers. How do staff feel working for the company? This information isn’t hard to find. It’s a matter of dedicating the time to it. Spend more time with the true source of information and less time on others’ opinions.
2. Fish in under-fished ponds
Fundies face many structural constraints that you don’t. Larger fund managers are incentivised to spend more time managing the risk of their business, rather than their portfolio. They end up reverting to herd mentality. You can see this when fund managers hold the same stocks, in the same markets.
As a private investor, you don’t face these same constraints. You have the freedom to search in other sectors/markets. You don’t have to find sexy stocks. Boring stocks can be just as profitable. Notice the latest fad and and start your search in the opposite direction. Find companies that have a small public share float. These are founder-led companies where the owners still own a significant portion of the shares. Large fund managers must deploy their capital and companies with small public share floats just won’t capture their attention.
Your advantage is entering into an under-researched trade so you can maximise your chances of finding a good company at a reasonable price. For Australian investors, it’s very easy to get the full list of companies on the ASX sorted by industry on the ASX website. The significant shareholders list is provided in every annual report.
Besides from searching based on sectors, you can look for opportunities in other international markets. Start with markets that others aren’t talking about. There are many free and paid online tools that you can use to find solid companies in these markets. Most allow you to apply a filter that you can use to research further and narrow down your choices to just a few. Take advantage of these little-known companies with less analyst coverage. As the company lays down its promising business expansion plan, you could be in the privileged position of paying the undervalued price before it makes its ultimate positive earnings announcement. Thus, you'll beat the fundies who will have to deal with a crowded market later on.
3. Focus on quality, not quantity
Fund managers have a business to run as well as a portfolio to manage. Their priority is to spend time marketing to increase the size of their fund and therefore fee income. As they become larger, they are forced to deploy more money in the stock market. Inevitably they can't spend too much time analysing any one company. Instead they start with the market index and tilt according to which sectors they think will do well. This leads to bloated portfolios that correlate highly with the index. This approach to investing won’t give you significant outperformance - it will give you average returns.
Since you don’t have these constraints, take your time to seek true quality in companies. Start from the ground up and focus on quality over quantity. A concentrated portfolio of solid companies you know intimately will perform better than a scatter-gun portfolio of thousands of stocks you haven’t spent much time understanding.
To overtake a car, you can’t drive in the same lane. Don’t assume that fund managers have a huge advantage over you. In fact, they face many structural constraints that you don’t. Choose a different but wiser approach to investing in the stock market and you can beat the fundies. Rely less on hearsay and develop a culture of getting factual information directly from the reliable source. Analyse all the information at hand and focus on quality over quantity. Be patient and be willing to invest in non-mainstream brand name companies. If you approach investing the same way as everyone else, you’ll get the same outcome as everyone else. Happy compounding.
Nice write up Lawrence, well done
Thanks Emanuel. I enjoyed contributing my first wire. Nice to connect with similar-minded investors.
Some very good points in this article, thanks, Lawrence. In my opinion, it worths mentioning that personal investors do not face the same level of short-term performance pressure faced by many professionals, therefore are more willing to hold a long-term view in making investment decisions.
Wonderful article thank you. Elizabeth
From my experience many fund managers are actually reluctant marketers and would rather spend most of their time investing. Investors demand access to the people running their money and I personally wouldn't invest without having had some level of exposure to the person running the fund - so marketing is a bit of a necessity. I think your first point is a strong one.. closely following company releases and attending results + AGMs will give you plenty of access to company CEOs. Thanks for the article Lawrence.
Good and an honest article. Thks a lot. It reinforces what I have been doing off late than solely relying on fund managers' published info. Good luck timing is a key thing in decision making. Greed often makes wrong timing surpassing the facts being ignored. Thanks again .
Lawrence. A very interesting article full of good points. I have had an 'amateurs' interest in the market for many years and can say that I have followed some of your guidelines with some good successes. However, for me, there is another side - where I have not been successful. This has happened when I have 'loved' a stock too much or thought 'I knew best'. A classic example for those with long memories was Burns Philp. I have money in my 'favourites' and with fund managers, for the fund managers I expect that they know when a company is sound and when to get out - a hand on the pulse so to speak -- if they are doing their job properly. Otherwise, if you have time and energy and want some excitement, your tips are worthwhile. Shaun Quinn
miniscule size is perhaps the key structural advantage small investors have over fundies, and it is sustainable competitive edge. it can frequently be exploited to improve personal returns in a way that a fundie cannot do due to their size. for example, small investors will often get a full allocation in SPPs etc, which a fundie simply cant get due to scalebacks from a much larger position. this improves personal returns cf fundie returns. personal investors can also move in (and out) of stocks - in various ways - with a position size of <$1m, which is impractical for most funds. this again creates a universe of opportunities that fundies simply can't access (recent examples would include building a position in the early days of PNC or the WLE/ WLEO arbitrage for example).
The ability to dedicate time and have the 'finger on the pulse' is the main advantage fundies have. At the same time there are also other structural constraints faced by fundies. Given the competitive landscape is constantly evolving, investment theses are never static, always dynamically evolving. @Shaun, I'll be writing a piece about emotional biases (including commitment bias) shortly. If you've chosen to drive with a manual car, then you'll have certain advantages - just make sure you dedicate the time to learning it properly, otherwise automatic is a safe choice.
I like your debut wire Lawrence, some very relevant advice to investors who enjoy picking stocks and have an interest in managing their own portfolio.
Interesting thanks. I have a friend who works for a fund manager and seems to spend much time visiting listed companies both here and overseas to assess their worth as investment propositions. The fund he works for is an Australian industry fund. Much as I would like to do that I feel that he might have an advantage. Cheers