For years, we’ve been told that the stock market is a game best left to the “smart money” on Wall Street. Yet the evidence points the other way: The S&P 500 Dow Jones Indices SPIVA U.S. Scorecard shows that more than 90 % of actively managed equity funds lag their benchmarks over a 15‑year horizon. What chance does an ordinary investor have if the vast majority of full‑time professionals, with research teams and trading floors at their disposal, fail to beat a low‑cost index fund?
Paradoxically, quite a good one. Precisely because individuals aren’t burdened by the size, fees, and short‑term performance pressures that weigh on institutions, they can exploit niches, act with agility, and hold positions for the long haul—advantages that large funds lack. With a disciplined process and a long‑term mindset, the so‑called “dumb money” isn’t dumb at all; it’s street smart.
Behavioral Advantages: Patience and Independence
Freedom from the Herd
Swimming with the tide is often a matter of survival for professional fund managers: underperformance can trigger client redemptions and end careers, so even when a manager spots a huge mispricing in the market, it is safer to stick close to the benchmark. To profit from a contrarian idea, he or she must be right on three fronts—analysis, timing, and investor relations—because a bet that is early (even if ultimately correct) bleeds performance and invites a stampede for the exits. A bet that the fund's investors aren't willing to take means the fund must inevitably close its position. The individual investor, answering solely to personal conviction and time horizon, never has to make that compromise.
- Michael Burry’s 2005 purchase of credit‑default swaps against sub‑prime mortgages is the textbook case: for two years, his fund bled while it had to pay premiums as housing prices kept rising, prompting angry investors to demand their money back and forcing Burry to gate withdrawals before the trade finally paid off in 2007‑08. Most managers, mindful of that career‑risk calculus, prefer the comfort of the crowd; if the whole market falls, they underperform only in lockstep.
Long-Term Focus and “Time Arbitrage”
Professional money managers live in a world of quarterly performance reports, client redemptions, and career risk. A small, self‑directed investor faces no such external pressure and can think in years, not months. Time is the small investor’s greatest ally: you can hold a sound stock through temporary setbacks, waiting for the market to recognize its true value.
- Ben Graham, the father of value investing, captured this idea perfectly: “In the short run, the market is a voting machine, but in the long run it is a weighing machine.” Independent investors can ignore Mr Market’s mood swings until the weighing machine takes over—an edge Wall Street pros rarely enjoy.
Structural Advantages: Freedom from Constraints
No Forced Diversification
Large funds often hold hundreds of stocks to mirror an index or meet diversification rules, which inevitably means owning many mediocre or even outright horrible stocks. Individual investors don’t have to over‑diversify or own anything they dislike. You can run a focused portfolio of your best ideas—just as Warren Buffett does—without having to own every heavyweight in the index. When your winners are allowed to breathe, they can materially lift overall returns.
Broader investment universe
Big institutions hunt almost exclusively in the large‑cap, highly liquid segment. Smaller companies and special situations (mergers, split-offs, etc.) attract far less analyst coverage, leaving a greater chance of mispriced stocks—a fertile hunting ground for individual investors.
- Buffett once remarked that if he were managing only a small sum (say US$1 million), he could “guarantee 50 % annual returns” in such neglected niches. Whether or not that number is realistic, the spirit of the comment still holds: it’s easier to earn high returns when you are small enough to buy overlooked gems that mega‑funds cannot.
Quick Enter and Exit
A giant fund must move hundreds of millions or even billions of dollars, often conveying its intentions and moving the price against itself. A small investor can enter or exit quietly, in minutes, and at minimal cost. No investment committee or rigid mandate blocks a strategic pivot, and—crucially—you can sit in cash if markets look frothy. Few professionals are allowed that flexibility. Even worse, most fund managers aren’t allowed to go to all cash even if they suspect a crash, but an individual can sit on the sidelines during frothy markets to avoid losses, as our family does mostly right now.
Lower Costs
Running an institutional fund involves layers of salaries, compliance, marketing, custody, and technology—only some of which appear in the published total‑expense ratio (TER). The TER does not account for indirect expenses like transaction costs, bid-ask spreads, opportunity costs, etc. Self‑directed investors avoid virtually all of those line items. With discount brokers, transaction fees have collapsed to pennies, and there are no management or performance fees siphoning off your gains. Every extra basis point you don’t pay compounds in your favour.
Conclusion: Embrace the Small Investor Advantage
The myth that individuals are doomed to underperform is exactly that—a myth. The playing field has never been more level, and in several respects it now tilts toward the little guy. By staying patient, thinking independently, and exploiting areas that Wall Street overlooks, a small investor can sidestep the short‑termism and benchmark hugging that plague so many institutional portfolios. Combine those structural freedoms with today’s abundance of information tools, and you can analyze businesses with professional‑grade rigour, minus the bureaucracy.
Size may be an advantage on the basketball court, but being small, nimble, and patient in the stock market can be a superpower.