Posts filed under “Apprenticed Investor”

The Amateur Advantage

How you, the amateur investor, can beat the pros
Barry Ritholtz
Washington Post, November 8, 2015



Since I started writing this column five years ago, I have consistently discussed how challenging managing your money can be. It shouldn’t be this difficult, but you humans tend to make things much more complicated than they need to be. Complexity, confusion, costs and lack of clarity — no wonder so many people are so unsatisfied with their portfolios’ performance.

I have pointed out all the innumerable advantages the pros have over Main Street investors. Charles Ellis, when he was overseeing the endowment fund at Yale University (now almost $24 billion!) made this observation about those advantages:

“Watch a pro football game, and it’s obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, ‘I don’t want to play against those guys!’

“Well, 90 percent of stock market volume is done by institutions, and half of that is done by the world’s 50 largest investment firms, deeply committed, vastly well prepared — the smartest sons of bitches in the world working their tails off all day long. You know what? I don’t want to play against those guys either.”

Ellis is surely correct in suggesting you don’t want to get on the field with either group of pros. They have the tools, the manpower, the capital, political connections, inside information — everything goes their way. If you try to compete against them on their own field, playing their game by their rules, the outcome is very likely to be what they want: You and your portfolio are toast.

But here is the thing: People who are not professional investors — those Mom and Pop investors I refer to all the time — have enormous advantages of their own.

Today’s column will help you recognize what you don’t have to do, deal with, pay for or worry about. Add all of these things together and you not only neutralize the disadvantages, but you can jiujitsu them to your favor. Let’s see if we can help you beat the pros by looking at five key areas: benchmarks, costs and fees, time, size, and career risk:

Benchmarks: Everyone who manages money for other people is measured against some benchmark. It doesn’t matter if you run a portfolio of stocks or bonds, domestic or overseas. There is an official index against which everything you do is judged, measured and compared.

If you run big cap stocks, then it’s the Standard & Poor’s 500-stock index. Emerging market equities? MSCI EAFE Market Index. Bonds? Barclays U.S. Aggregate Bond Index. The list goes on and on, and each is updated in real time. Literally, you can see how you are performing — or more likely underperforming — second by second, tick by tick.

You, the individual? You have no benchmark to meet or beat on a quarterly or annual basis; meanwhile, the Street is rife with stories of investors calling to complain about monthly and even weekly underperformance. You can feast on Beta instead of starving on Alpha.

That’s another thing: You have no outside investors. You don’t have to spend a lot of time thinking about how you are going to market yourself. You don’t need a pitch book or a PowerPoint presentation of any kind. Skip the quarterly conference calls with angry investors and blow off the withering media glare and cruel criticism from your peers at other funds.

Costs and fees: We have long discussed that many of the fees charged in finance are an egregious drag on returns. There is an argument to be made that some hedge funds (perhaps more than a few) are merely a wealth transfer mechanism for moving money from the gullible wealthy to the savvy manager.

The issue of costs is quite simple: You can keep yours cheap, while the pros cannot. You don’t have to fly around the world to meet prospective clients, or be seen schmoozing at pricey conferences. You don’t need an expensive office (spectacular views required), filled with modern furniture and pricey art. You don’t have to build an impressive research department, along with legal and compliance personnel. You don’t need a multinational accounting team to deal with your tax headaches.

Your execution costs are practically zero, certainly under $10 anytime you need an order executed. Your cost structure, fees and taxes are within your control.

Time: Being able to think long term and have patience is a luxury the professionals do not enjoy. You can have much, much longer-term time horizons. That last 15 percent correction? The pros were pulling their remaining hairs out over either missing the initial drop or not being positioned to take advantage of the recovery. And that happens every time the market moves more than 5 percent in either direction. You don’t have to worry about every zig and zag. It is a huge advantage to the amateur over the pro that a quarter is merely one fourth of the year, not a measuring stick that will soon lead to your first cardiac event. Time is on your side, compounding your returns in your favor.

Size: If you decide you want to own something, well, then, you just buy it. You can enter or exit a position without impacting markets; you don’t have to limit yourself to just the largest stocks or worry about position size (this is a huge thing). No high-frequency traders are trying to pick off your orders, no worrying about dark pools and other such stuff.

And there is no public scrutiny of your holdings and no disclosures required. You don’t have to file with the SEC every time you decide to add or subtract from a position.

Career risk: There is a tendency for agents — that’s the economist’s term for people who operate on behalf of others — to manage risk very conservatively. Take fewer chances. Don’t do anything that might make you look foolish or get you fired.This turns out to be a prudent way to manage your career but a poor way to run money. Gains require some risk, which is why agents’ own interests may not be those of their clients.You don’t have any such conflicts. You won’t get fired for admitting a mistake. You don’t have to care about drawdowns, or buying something that runs into a hiccup soon after. You can do unpopular things that look dumb short term but are money-makers long term. Pros don’t want to risk their careers by doing what makes sense eventually. (Buy emerging markets when they are cheap? Sell expensive stocks?)The pros have a very specific set of measurements by which their performance gets judged. Usually, these involve alpha, or assets under management or gross revenue. Unlike the pros, you get to set your own metrics for assessing how well you are doing. That means you first must figure out what your long-term financial goals are, then create a plan to achieve your objectives. You get to measure your success by seeing if you are on track to achieve those goals. This is another enormous advantage you have over the professional stock jockeys.You can beat the pros — but instead of playing their game, with all of the home field advantages they have, try playing a game of your own choosing.


Ritholtz is chairman and chief investment officer of Ritholtz Wealth Management. He is the author of “Bailout Nation” and runs a finance blog,The Big Picture. On Twitter: @Ritholtz.


Category: Apprenticed Investor, Asset Allocation, Investing, Philosophy

The Amateur Investing Advantage

    My Sunday Washington Post Business Section column is out. This morning, we look at the advantages that the Mom & Pop investor have over the professional. Its titled How you, the amateur investor, can beat the pros – and its not about what you might think. Here’s an excerpt from the column: “The pros have…Read More

Category: Apprenticed Investor, Asset Allocation, Investing, Philosophy

‘Never Buy a Boat’ and Other Misguided Financial Advice

‘Never buy a boat’ and other rash financial advice Barry Ritholtz Washington Post, September 27, 2015       “A boat is a hole in the water you throw money into.” “The two happiest days in a sailor’s life are the day he buys a boat and the day he sells it.”   I have…Read More

Category: Apprenticed Investor, Consumer Spending, Really, really bad calls

#badadvice to Ruin Your Financial Life

How to ruin your financial life, #badadvice Barry Ritholtz Washington Post, September 13 2015       About two years ago, Ezra Klein wrote in The Washington Post about University of Chicago social scientist Harold Pollack, who “managed to write down pretty much everything you need to know on a 4×6 index card” about investing. I thought…Read More

Category: Apprenticed Investor, Humor, Investing, Really, really bad calls

A Word About Our New Fee Reduction Program

This week we had a few milestones: On Tuesday, we celebrated the two year anniversary of RWM, which launched on September 16, 2013. Second, we announced a new program that will help lower fees for our clients. Costs are something we are very conscious about. We are always looking for ways to keep fees as low as we can,…Read More

Category: Apprenticed Investor, Asset Allocation, Investing, Psychology

The advice to ensure financial ruin? It fits on a 4×6 index card.

    My Sunday Washington Post Business Section column is out. This morning, we look at the idea of putting all if the financial advice anyone needs on an 4×6 index card — the twist is to invert it, via some really bad advice. Both the print and online versions had the Twitter friendly headline How to ruin…Read More

Category: Apprenticed Investor, Humor, Investing, Really, really bad calls

Five things you can do to get your financial house in order

A rollicking week in the markets is really a chance to clean up your act Barry Ritholtz Washington Post,  August 28 2015       Don’t say you weren’t warned. A few months ago, with markets on a hot streak, you were given the Solomonic heads-up that “this, too, shall pass.” Your portfolio was basking in the…Read More

Category: Apprenticed Investor, Asset Allocation, Index/ETFs, Investing

Investors: Another Chance to Clean Up Your Acts

      My Sunday Washington Post Business Section column is out. This morning, we follow up a June column that advised taking advantage of markets at all time highs to clean up your portfolios. This time out, we look at the market turmoil as a reminder, and the snapback rally as an opportunity. The print version…Read More

Category: Apprenticed Investor, Asset Allocation, Investing, Really, really bad calls, Trading

Arthur Zeikel’s Investing Rules

Arthur Zeikel, president of Merrill Lynch Asset Management, sent his daughter a letter teaching her some investing basics. Enjoy! Personal portfolio management is not a competitive sport. It is, instead, an important individualized effort to achieve some predetermined financial goal by balancing one’s risk-tolerance level with the desire to enhance capital wealth. Good investment management practices…Read More

Category: Apprenticed Investor, Investing, Rules

Sorting Through Online Investment Noise

As Theodore Sturgeon famously observed, 90 percent of science fiction is crap, but then again 90 percent of everything is crap. In the world of online investment opinions, Sturgeon was an optimist. Not all that long ago, the perspectives of individual amateur investors and professional ones, too, were for the most part unknown. Most market…Read More

Category: Apprenticed Investor, Gold & Precious Metals, Really, really bad calls, Web/Tech