David Van Knapp
 
 
 
Stock Investing: Why the Individual Often Has an Advantage Over the "Pros"
Famed investor Peter Lynch said, "...the amateur investor
has numerous built-in advantages that, if exploited, should
result in his or her outperforming the experts, and also
the market in general."
 
Many people believe that an individual cannot beat the
market. They think that they cannot, over long periods of
time, generate better returns than the market itself, nor
outperform professional money managers who, after all, do
this for a living.
 
But Lynch was right. Many individuals can and do beat the
market and the experts. Let's see why the individual
investor actually has certain advantages over the pros.
 
First, as an individual investor, you run your own shop.
Unlike many professional money managers, no boss is telling
you to be fully invested. If, during bad market conditions,
cash is the best place for your "stock money," you can keep
it in cash and no one will fire you. You can wait for the
right price or for other conditions you may require. You
can even get out of the market entirely for awhile. You
decide what to do with your capital. You are your own
fiduciary.
 
Second, the amount of money you have to invest is small
compared to, say, mutual  funds. Many mutual funds own
unattractive stocks. They do so because they have so much
money to invest. So the fund managers go through their
first tier of good ideas and on to their second tier, and
maybe even into their third. Their fund's charter may
require diversification across a broad range of stocks or
investment in illogical sectors. You, on the other hand,
can keep your holdings concentrated in your best
opportunities.
 
Third, you can control expenses better. You can buy and
sell using the cheapest brokerage--after all, the execution
of stock trades is a commodity service. Why pay $20 or $100
per trade when you can get it done for $10 or $7 or even
less? Plus, as your own boss, you don't have to pay
management fees, "wrap" fees, or marketing expenses, none
of which help returns. All of the information you need to
invest intelligently is widely available, and it is free.
So you don't have to pay for analysis…you do it yourself.
 
Fourth, you will always have your own best interests in
mind. Sad to say, at many mutual funds, the primary mission
is to attract more investors and grow the fund. Incentives
are set that way. Your personal investing incentive, in
contrast, is to take care of your money. Nobody will ever
manage your money better than you will. Nobody cares more
about your money than you do, and nobody understands you
better.
 
Fifth, you control taxable events. When you own a stock, no
taxable event takes place until you sell it. Capital gains
(or losses) are just on paper. In contrast, mutual fund
shareholders own shares in the fund but not in the
individual stocks that the fund owns. Therefore they are at
the mercy of sell decisions made by the fund's managers. A
mutual fund can generate taxable gains even though the fund
itself declines in value. This happens whenever the fund
sells some stocks at a profit but does not offset those
gains by selling other stocks with losses. So the fund has
net profits on its trades even if the total asset value of
the fund is lower overall. The net trading profits (by law)
are passed through to the fund's owners. Those unfortunate
souls are left not only with a tax bill but also with an
investment worth less than before. But if you own
individual stocks, you are in sole control of selling
decisions and the attendant tax consequences.
 
Finally, you don't have to worry about "style drift." For
example, the rules for a small-company mutual fund may
force the fund's manager to sell a stock if its market size
exceeds a certain limit. That's what its prospectus
promises its investors. But that growth is just what you
are looking for! You want your small companies to succeed
and become large companies. You don't want to sell those
stocks, you want to keep them as long as they are
performing well.
 
Peter  Lynch had it right. He understood that the
individual stock owner holds some cards that the
professionals only wish they had. If the cards are played
right, the individual can surpass both the pros and the
market.
 
 
----------------------------------------------------
Dave Van Knapp is the author of "Sensible Stock Investing:
How to Pick, Value, and Manage Stocks."
Learn more about his step-by-step guide for individual
investors at http://www.SensibleStocks.com . Or go directly
to Amazon.com, where the book has a perfect 5-star reader
rating:
81420/ref=sr_1_1/002-5852738-5260830?ie=UTF8&s=books .