Why It’s Easy to Beat Erratic Fund Managers

Professional fund managers have all the advantages, right? Wrong. It’s actually you, the individual investor, who has many more advantages than you think.

OK, so you might not have the investment knowledge and experience equal to that of fund managers. But limited capital and a long time horizon are all the advantages you need.

Let’s first look at limited capital.

Let’s say you have $10,000–50,000 to invest. With this amount, you could either invest in a billion-dollar behemoth. Or you could take a look at some extremely cheap microcaps.

A fund manager who needs to deploy $100–500 million doesn’t have the same luxury. They can’t invest in smaller opportunity missed by many investors, even if they wanted to. Instead, they are left to investing in the company followed by thousands of other investors.

Even as Warren Buffett continues to grow his funds to deploy, he’s told shareholders not to expect similar high returns they once did. This is simply because Buffett is limited to the biggest, most followed stocks in the market.

In a 1999 Businessweek interview, Buffett said:

If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow.

You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.

Now let’s look at time.

A long time horizon (five to 10 years) is one of your biggest advantages. Don’t believe me?

Let’s say you’ve found a stock you like and you believe it’s going to the moon. It would be almost impossible to not expect it to have some problems along the way. The company could miss its earnings guidance, cut dividends, or even run into a lawsuit.

But because you have faith in your research and confidence in the company’s ability, you can hold on as earnings and cash continue to grow.

It’s a different story for fund managers.

Reporting poor performance is never ideal. Poor results can cause investors to sell out of the fund. This means fund managers need to sell some of their holdings to return capital to investors. But the act of selling pushes their holdings down further, causing more investors to jump ship. You can see how this could turn into a cycle.

This is why most fund managers always want to be in stocks with great short-term expectations. This looks good to their investors, but is extremely hard to pull off. Knowing which stocks will rise or fall in the next quarter is basically impossible.

You can see this happening right now. Fund managers have had their fill of tech stocks and are now selling out to buy banks. I wouldn’t be surprised if, in the next few quarters, we see fund managers sell out of banks and into some other sector.

OK, so you agree with me about your advantages, but where should you get started? I’d suggest you take a look at income specialist Matt Hibbard’s report, ‘Top 5 Dividend Stocks in Australia for 2017’.

Some of the stocks Matt mentions pay reliable yields of 6%, 7%, 8%, and more. That’s more than 5% higher compared to what you’d get on an Aussie 10-year bond for just slightly more risk (though keep in mind that all stock investing is inherently risky).

To get your free copy of Matt’s report, click here.

Härje Ronngard,

Junior Analyst, Money Morning


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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