I just wrote on how to invest in stocks.
Nevertheless, most Koreans would say individuals should not invest in stocks, because they simply believe that institutional investors are better than positioned than individual retail investors for the following reasons:
1) Lack of financial knowledge and experience
2) Lack of access to information specific to companies
3) Insufficient financial capability and tools (e.g. shorting)
Who is good in the first place? You have to invest even a small amount to study and experience losing and winning money. Otherwise, you will never be able to control your mind later when you invest a large sum of money.
Putting the counter-argument aside, I will list the advantages of individual investors over fund managers and institutional investors.
- Longer time horizon
Fund managers cannot hold their investments for 10 years because they need to realize profit. On the other hand, an individual can carry it for more than 10 or 20 years (In other words, as long as they want).
- Free from financial regulations/compliance
Fund managers have compliance issues. Therefore, the selection of stocks is limited. But individual investors are free from compliance issues.
- No need to outperform the market every time
Pertaining to the point 2 above, individual investors’ the tolerance for loss is greater than fund managers. The financial market has many ups and downs naturally, and when it goes down, fund managers have to sell at a certain level of loss as they are bound by regulation and compliance.
However, individual investors can hold onto them even whey they make -50% losses, as long as they are growing companies in the long-run. Of course, retail investors must learn to control their mind during the bear market.
In other words, the fund managers have to be profitable on a continuous basis (otherwise they get fired for not performing well), so they have to predict most of the ripples in the stock market and make a profit. However, research has shown that only about 40% of fund managers have a positive alpha return that is actually better than the market. That’s how difficult it is.
The fund manager should make a profit on all of these ripples. (2004-2018 KOSPI closing price)
However, individual investors do not focus on short-term gains and losses, but only look at the long-term.
Individuals can just carry it with them. (2004-2018 KOSPI closing price)
Likewise, lack of access to information specific to companies can be overcome by long-term investment. In fact, if you make a long-term investment of 5 to 20 years, the stock price will inevitably be affected more by the growth potential of the industry to which the company belongs, than by information that affects the company in the short-run. In other words, information power that can influence stock price movements in the short run becomes less meaningful in the long run.
The lack of financial power is also an advantage for individual investors. When running a large amount of investment, there are several inevitable restrictions because it affects the market price. For example, if fund manager hold several millions worth of stocks for a single company, when they need to sell they would need to carefully execute trade. Whereas individual investors who trade with a small amount do not have to worry about trade related restrictions.
So, for individual investors win in the stock market, they need to keep in mind the following:
1) Do not borrow credit or make leverage to invest (if you do, you will not be able to make long-term investments psychologically)
2) Do not trade only by looking at chart analysis (a.k.a technical analysis)
3) Study industries, and economy to find growing industries and invest in the best companies
4) Just forget about it for 5-10 years
Of course, the premise here is to invest in a good company in a growing industry, so it is essential to 1) know how to find a growing industry and 2) develop the ability to find a good company.
I made a similar YouTube video on this topic.
In Korea, where real estate is a god like belief, many people think that investing in real estate, rather than, stocks is essential.
In the next article, I’ll write about why I do not plan to invest in real estate in the near future.
Korean article can be found here.
