Why You Have An Advantage Over The Pros.
When I tell people I invest in the stock market I hear a lot of remarks like : “The stock market is a loser’s game, you can never beat those big Wall-Street banks.”
Yes, big Wall-Street banks and financial institutions have billions of dollars at their disposal. Yes, they have the most intelligent people. Yes, they have state of the art technology. Yes, they have powerful connections in the business world. Yes.. they have everything available to dominate the stock market.
BUT, there is a serious advantage you have over the professionals.
Look Where No One Is Looking
Do you know how many analysts follow Apple? Facebook? Tesla? Nike? Chevron? I can’t tell you the exact number, but I can tell you that enough analysts follow those stocks that it is extremely hard to spot something that they didn’t already spot. Therefore, it is incredibly hard to outperform the professionals when you are looking at huge corporations that attracts attention from the big players.
As Peter Lynch said in his book One Up On Wall-Street,
“If I could avoid a single stock, it would be the hottest stock in the hottest industry, the one that gets the most favourable publicity, the one that every investor hears about in the car pool or on the commuter train.”
So in order to beat the professionals, you have to look where they aren’t. In fact, you have to look where most other individual investors won’t look.
Where Should I Look?
First of all, look at industries that make people yawn. Industries with relatively simple business models that have been around for quite a while. These companies are often boring, and don’t make for a good story on a cocktail party. These companies aren’t covered by financial news channels or by most of the investors, simply because they aren’t exciting.
He Was Probably Analysing A Boring Company 😉
The human brain craves excitement, and we try to avoid boredom. Therefore, a lot of investors avoid these companies without even realizing it. I have to admit, analysing these companies can be quite boring, but their returns make it very exciting!
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” Paul Samuelson
So you have your best chances when looking at boring industries. However, big Wall-Street banks also look at the biggest companies in these boring industries, so this alone isn’t enough (Even though much less than they cover exciting industries). Therefore, the second point you need to look at is the size of these companies. Because the big institutions are covering almost all of the large-cap companies, but lack coverage of most small-cap companies (and also of many mid-cap companies). Therefore, small-cap and mid-cap stocks often provide the best investment opportunities.
Personally, I specialize in small- & mid-cap stocks from The Netherlands, since there is so little analyst coverage there (and I am from The Netherlands myself, so I have good insight what is going on there). Very lucrative.
Dutch Small & Mid-Caps
Source : IEX.NL
With small- & mid-cap stocks, it is possible to spot something the majority hasn’t spotted, simply because not a lot of investors are looking there. And when you can spot something that others don’t, you can make a lot of profit!
Why Aren’t The Professionals Looking There?
The professionals from big Wall-Street banks aren’t looking there because these companies are too small for them to invest in. First of all, the possible profit is too little in comparison to their portfolio. Let’s take JPMorgan Chase & Co (Ticker : JPM) as an example. In the top positions of their portfolio, we find Apple (position of $7 billion), Microsoft (position of $4.5 billion) and Wells Fargo (position of $5.4 billion). You can imagine that such a bank isn’t interested in making an investment of $50 million, simply because the possible profit is too low for them. Imagine that you have 10 million dollars, you wouldn’t really be interested to make an investment of a $1000 either.
Secondly, if they would invest a meaningful amount in a smaller company, they end up owning a large part of the company. At that point, special rules and regulations start to apply. This is something the big players on Wall-Street want to avoid. So as you see, big institutions aren’t willing to cover the smaller companies. You on the other hand, could profit massively from this.
I am not telling you to completely ignore large-cap stocks, because it certainly is possible to earn a nice profit on them. Especially in times of crisis and panic for example, as long as you are able to stay rational when everyone around you isn’t. However, when times are normal, the odds are in your favour when you look at small-cap and mid-cap stocks. This is where you can spot undervalued stocks, that others haven’t!