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I frankly think it's a a tragedy in America that the small investor has been convinced that they don't have a chance, that they don't the big institutions with all their computers and all their degrees and all their money have all the edges. That just isn't true at all. Most investors believe that big institutions have an edge over them when it comes to investing in the stock market.
And they attribute that to obvious reasons such as them having expert analysts with IV leak education who work countless hours every day having much more available data, more advanced analysis tools, and many more. But what if I told you that the legendary investor Peter Lynch, regarded as perhaps the greatest mutual fund managers of all time, who managed to double the yearly return of the market consistently for more than a decade, claims just the opposite.
He strongly believes that the institutional investors have a number of big disadvantages over the average value investor and if the individual investors are aware of them and use them to their advantage, they can easily outperform the majority of these institutions. Peter Lynch believes it so much that he even wrote two books on this subject named One Up on Wall Street and how to beat the streets.
So, in this video, we will explore his and some of Warren Buffett's timeless advice on what they believe those disadvantages to be and discover how you can use them to your advantage to outperform more than 90% of institutional investors. The first most notable difference is size and more specifically simply the amount with which someone invests.
The reason why this is so important is because an institutional investor cannot simply invest in a small company and expect a meaningful return. For example, a fund such as Warren Buffett's Burkshar Hathaway currently has around $600 billion he can use to invest with. This is a combination of around $315 billion of cash and around $250 billion additional already deployed in the market.
So for them, buying a company with a market capitalization of under a billion dollars would not make any sense since even a five-fold increase of this company's size will lead to less than 1% increase of the value of Birkshar's portfolio. Meaning that most companies of that size or lower are often being left out by institutions.
Warren Buffett has even said that publicly and have claimed that he would be able to achieve a much higher return if he was investing with a small amount of money. I think I can name a half a dozen people that I think could compound uh a million dollars or at least they could earn 50% a year on a million dollars have that as an expectation and those people could not compound money a h 100red million or a billion at anything remotely like that rate.
I mean there I think working with a very small sum that there is an opportunity to earn very high returns but that that advantage disappears very rapidly as the money compounds because I you know from a million to 10 million I would say it would fall off dramatically. Uh so what Buffett explained in this clip is that big institutions are forced to shy away from smaller companies and focus on investing in big enterprises.
This creates something amazing for the individual investor which Peter Lynch calls 100 bugger opportunities which are investments that have the potential to 100x their initial investment. In Peter Lynch's beating the street book, he described how it can be very profitable to go there where institutional investors and fund managers are afraid to invest.
In the book, Peter Lynch writes about all of his investing principles where in his principle number 18, he says, "When even the analysts are bored, it's time to start buying." This often results in companies having much lower prices than their real value. One advantage of such companies, as he explains, is that the founders typically own a large portion of the shares.
So it is much easier for them to follow their core principles and for you to assess them instead of the company being owned by 10 large institutions with 10 different ideas on how the future of this company should look like. Also, these companies usually have a lot more growth potential. It is much easier for a small company to be selling, let's say, 1 million worth of goods in one city and then expand to more cities than to the entire country it operates in and finally go internationally and 100x their sales.
Even most big companies started like that. Take Facebook for example, which was initially only offering its services to one university, then expanded into many more and now is used by about half of the world's population. or even Amazon, which was initially selling books online and now is the go-to place for a big part of the world when they want to buy something online.
In comparison, an already wellestablished company like Apple or Coca-Cola already have an incredible amount of users. So, it is almost unimaginable for them to suddenly start selling products to couple of times as many people. So let's explore the second biggest advantage for individual investors and it is that you have a full control over the amount you invest with.
You heard that right. Institutions have a lot less control over how they decide to invest compared to you. For example, most institutions do not own their funds but rather rely on other people's money so they can buy and sell securities on the market. So usually what happens is that when there is a market decline or a crash, people tend to withdraw their money from these funds exactly when the prices of securities are low, forcing institutions to sell some of their investments at a loss so they can refund the investors.
Vice versa, just the opposite happens during a bull market, resulting in them having a lot of cash just when prices are extremely high, forcing them to either buy at overvalued prices or hold cash and produce lower returns on the overall portfolio. These two things exactly oppose the beliefs of Peter Lynch and Warren Buffett where they believe that you should buy stocks only when they are selling at a big discount to their intrinsic value.
that they buy a stock and they think if it goes up it's wonderful and if it goes down it's bad. We think just the opposite. When it goes down we love it because we'll buy more and if it goes up we it kills us to buy more. But if you can't get yourself in that mental attitude, you're going to be scared whenever everybody else is scared.
That's where the famous Buffett quote comes from. Be fearful when others are greedy and greedy when others are fearful. This is why if you look at something called the SPIVA indicator, you can see that in the US almost 90% of institutions underperform the S&P 500 index fund. And the exact same thing can be seen for different countries around the world as well.
To top this off, all fund managers managing over $und00 million are obligated to submit a 13F filing to the public every 3 months where everyone, even normal investors like me and you, can see what they're buying and selling for the current quarter. This can cause other investors and institutions to see what positions they have decided to buy into or sell out of and cause them to do the same thing.
Additionally, causing higher buying prices and lower selling prices for them. I think the public can do extremely well in the stock market on their own. I think the fact that institutions dominate the market today is a positive for small investors. These institutions push stocks on usual lows. They push them on usual highs.
for someone that can sit back and have their own opinion, know something about industry. This is a positive. It's not enigma. Finally, a big challenge that most of these institutions are facing is the expectation from shareholders for a steady yearly return and avoiding risk. Meaning that those institutions are not able to simply purchase a stock from a company that is expected to produce a positive return in a couple of years time.
Since investors want to achieve a steady return causing most institutions to shy away from more long-term investments and concentrate on stocks that can produce results in the short term. Also, investors will be unhappy if a fund produces a negative return even if that is what the market has produced during the same year.
So these funds are forced to do two things that negatively impact their returns. The first one is called hedging where after buying a stock they usually buy put options that cover the downside in case of a stock drop which eats away from their returns. And the second thing they tend to do is overdiversify in a lot of different industries and markets which again can offset the returns of the great stocks with the mediocre stocks so that they can be more riskaverse.
I don't believe in diversification at all. I I would own one stock if I could find one great stock. Diversification is a big mistake. I call it diversification. But the you buy this thing that might balance this other thing and they both go down. It uh these reasons are clear indication on why Peter Lynch and Warren Buffett both believe that individual value investors have big advantages over most major institutions.
So, if you want to learn how to invest like those legendary value investors, check out these videos where I explore their investing strategies and principles in details and explain how they managed to consistently outperform the market.
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