We all know the story of David and Goliath. The story of an ordinary boy who defeated a giant of a man. In fact, over time, the story has become so definitive and popular, that the very term David and Goliath is now used as a reference to a situation where an underdog is pitted against an overwhelming favourite in a competitive scenario. David beat Goliath back then, and I’m pretty sure he can beat him in the stock markets too. Wait, wait, wait. I’m not saying that they show up in today’s day and age and begin their battle all over again. So what in the world am I rambling on about? Read on to find out.
When it comes to the stock market, David is the personification of the average everyday individual retail investors like you and me with no professional experience of doing the job, and maybe the inability to afford consistent professional help. Now we come to who the Goliath in the story is. Goliath represents a specific class of the retail investor’s competitors. I’m talking about those smart, good looking men and women, who show up in suits and formal wear, work at leading brokerage firms or investment fund houses and call themselves investment managers. These guys usually come from an educational background which involved studying finance and the stock markets at some point of time or the other. Combine this with the fact that they get all the news in the markets straight off the press because they work for reputed firms and institutions, because of which everyone out there treats their opinions and advice as biblical wisdom, it would seem as if the individual retail investor does not stand an earthly chance against these guys. Perfect David and Goliath situation.
But like I said earlier, and as the title of this piece suggests, David can beat Goliath in the stock markets too. And this is something that is, contrary to what popular belief might suggest and make you believe, very easy to do. So here’s how any David can give every Goliath a run for their money in the stock markets.
Just because you might be the David of the story, don’t get petrified by the apparent size and power of Goliath. After all, the bigger they are, the harder they fall. And let me make you party to a little secret. If you’re the David here you have something that every Goliath can almost never have. Independence. When you look at the average investment manager, oh sorry, the average Goliath, you only see the degree in Finance, the swanky formal wear, and the enviable job which fills his or her coffers. What you cannot see, are the invisible puppet strings attached to these guys. And who are pulling the strings here? The puppet masters of course, better known to us as the bosses and superiors of the investment manager. Let me elaborate.
Let’s say there are two stocks, one markedly better than the other. Assuming that both you and the investment manager understand this, you both decide to buy as much as you can of this stock. You promptly go out and buy, but the investment manager doesn’t. Why? Well you see, the manager’s boss may say that this perfectly good stock comes from a sector and an industry which the firm as a whole isn’t covering at the moment, because of which the boss has major apprehensions about investing in the stock, and therefore may veto the purchase. Puppet master wins. The retail investor ends up making a hefty profit. See what I mean about independence?
The second advantage that David has over Goliath in this situation is the amount of capital invested. Retail investors invariably invest lesser amounts than investment managers because the managers usually invest on behalf of the firm and their clients, and thereby they usually have a lot more money available to invest. This turns out to be a handicap for the investment managers for two reasons. Firstly when a lot of money ends up being invested, it becomes a lot tougher to generate the required amount of returns. Retail investors invariably invest a lot lesser and therefore the returns can be more easily achieved. Lets say I as a retail investor invest 1 million worth of money and my corporate counterpart invests 10 million, with both of us expecting a 10% return per annum. For me to achieve my target, I need to ensure that my portfolio increases by a hundred thousand, but to achieve the same kind of returns, my counterpart has to see his portfolio increase by a million. This effectively means that I need to have just one or two outperformers in my portfolio and I reach the finish line. But my counterpart on the other hand, needs to have maybe three or four outperformers in his portfolio, failing which his targets may not be met.
Secondly, investment managers need to be close to fully invested, if not absolutely fully invested in the markets at all points of time, thus taking a lot of flexibility out of the picture from their perspective. Retail investors on the other hand have the advantage of a lot more flexibility on their hands because they can invest at their own pace and on their own terms with the option of sitting out of the markets and watching for a period of time if circumstances don’t suit them thus allowing them to be highly adaptable. Do remember that there are times and circumstances in the markets when idle cash is a better option than deploying money in the markets. And given that investing is a dynamic discipline and markets are ever dynamic and volatile, flexibility and adaptability can prove to be a major asset.
These investment managers, our dear Goliaths, may seem fearsome to a retail investor, but let me tell you, they are the people who are more likely to be filled with fear at all points of time. Why? Because they know that for all the perks that come with their jobs, they may be just one bad year for their portfolios in the markets, just one year of underperformance in comparison to their peers away from receiving a pink slip or a termination letter instead of a paycheque, with question marks over their ability and reputation thrown in for free. Retail investors on the other hand have nothing of that sort to be worried about. They can treat a bad year in the market as just a part and parcel of the game and need not benchmark their performance against anyone except themselves. Nothing to worry about, right?
So if you find yourself in the shoes of David, remember not to be in awe of the Goliaths in the stock markets, because as you have just seen, there is nothing about them that you need to fear, and you are more than well equipped to make them eat dust. And for any investment managers or Goliaths out there reading this, I know I have given you and your kind a lot of stick during this piece, but before you come looking for me, remember that there is a David inside you as well. Along with being an investment manager remember that you can also be an individual investor with a personal portfolio at the same time, giving you most of the advantages enjoyed by individual investors. And as far as decreased independence in a professional capacity is concerned, where you are confident about a stock and your higher ups may not agree with you, go ahead and make the stock a part of your personal portfolio. If the stock does well, you have concrete proof which you can show the higher ups and your stand would be vindicated. And who knows, you may even end up getting your hands on that big promotion and take your place among the top brass of your company earlier than expected. Once that happens, just remember not to be as much of a puppet master as your boss once was.
And if by chance, the stock you picked on your own conviction doesn’t end up doing well, look at the bright side, you haven’t lost money for the company with your stock pick, your job is still intact and there’s always another personal stock pick which you can get right. So though you’re the Goliath, never forget to use the David inside you if need be, because it can sometimes make a better Goliath out of you.
Here’s hoping that this piece goes a long way towards helping everyone who reads this piece, both the Davids and the Goliaths, beat the markets.