Do retail investors stand a chance against professional investors?

I used to assume that individuals (“retail investors”) don’t stand a chance at competing Wall Street. In my post about individual stock-picking, I talked about my bias towards passive investing (read: index funds) and accidental aversion to stock picking.

The way that I was looking at is was too narrow: likening Wall Street pros to NBA all stars, and me trying to play ball against them.

However, as Morgan Housel said in The Psychology of Money, finance is a weird arena of life where behavior can drive outcomes more than skill or innate talent.

Doing well with money has a little to do with how smart you are and a lot to do with how you behave.

And behavior is hard to reach, even to really smart people.

A humble worker who slowly invests in blue-chip stocks and lives within her means can outperform the cocky financier who gets into debt due to excessive spending. Cocaine is a hell of a drug.

In other words: finance is not one game with fixed constraints like basketball.

It’s multivariate game where individual decisions, timing, blind luck and all can factor into someone’s financial life. The good news is that the game is big enough (the stock market is huge) where different players, with different abilities and approaches, can all stand to win.

Can you swim with the sharks?

Let’s just first acknowledge that very smart people get into finance. I’m not discounting that at all. The CFA exam, a test for financial analysts, is one of the hardest certifications to get. This is their job, they understand the numbers, and I wouldn’t hope to compete against them in understanding company financials.

Let’s consider the disadvantages that working, finance professionals may have—and where the individual investor might have an advantage.

Note: I’ll refer to institutional traders and finance professionals as as “Professionals” throughout the article.

Career Risk

Professionals have to work with much bigger capital at one time. Imagine deciding on recommending to your boss to allocate 1% more of your fund to Bitcoin – this may be whatever to the individual investor, but could translate to millions in a big fund. If you make the wrong call, what happens to you professionally?

This research report (PDF) from investment firm State Street highlights short term pressures that affect the decision making of professional wealth managers:

Among asset owners, most of that pressure came from the board (37%), management team (30%) and the investment consultants they have hired (17%). Just as important, however, was perceived career risk: About half of all industry professionals worry about this, and among this group 52% believe they would be fired after 18 months of underperformance.

Finance professionals, first a foremost, have a career to think of. They are operating in the structure of their company and management.

The report continues:

Among asset managers and wealth managers, 36% report that acting in the best interest of their client actually implied taking on career risk. 

…Performance assessments of managers tend to be carried out over shorter time periods versus the longer-term investing horizon of clients… short-term losses could drive an investor to terminate a relationship with a manager, even if the investor benefit from the investment in the long run.

Similarly, 24% feel organizational pressure to take too little risk on behalf of their clients, and 25% feel pressure to replicate exposures in their benchmark — even when they believe they are suboptimal investments.

Now, there’s a difference between wealth managers, financial advisors and Wall Street traders. What this report highlights is that career risk is a factor that impacts a finance professional’s decision making – including the investment picks they make.

The individual investor may also be optimized to have more freedom in this regard, since their trading can be decoupled from their career.

Too much information

Worldwide, there’s around 630,000 publicly traded companies.
The NYSE has over 2,400 companies.

Do professionals have the focus to go super deep on one company?

I wonder if they have an informational disadvantage by having access to too much information.

Analyst Alex Potter said on the the popular Tesla Daily channel:

“There are companies I’ve covered through the years that I would not…you know I wouldn’t want you to hold me to every single number in the model…”

Analyst Alex Potter

Imagine trying to consume all the CEO interviews and financials of 100 companies versus, let’s say 10 that an individual investor might be following.

That leaves opportunity on the table for a “normal” investors. Imagine the scientist who’s obsessed with biotech, or the gamer who’s excited about the Roblox IPO. They can go deep in one company, niche or industry—and perhaps do well.

The Echo Chamber of the Elites

Imagine the typical background of a Wall Street investor: Ivy League educated, goes into investment banking or consulting, and is surrounded by others of similar pedigree. You may end up with a homogeneous population of finance professionals who are coworkers and industry colleagues, all thinking and behaving similarly.

What if that becomes an echo chamber where original ideas don’t get much oxygen?

After all, how many people within high finance saw 2008 coming?
How many “yuppie elites” got Bitcoin wrong, and still disregard cryptocurrencies?

There’s a famous story about Peter Lynch, mutual fund rockstar, who bought Dunkin Donuts.

[Lynch] has also often said that the individual investor is potentially more capable of making money from stocks than a fund manager, because they are able to spot good investments in their day-to-day lives before Wall Street.

…many of the investments he found when not in his office. For example, in One Up Lynch explains how he invested in Dunkin’ Donuts not after reading about the company in The Wall Street Journal, but after being impressed by their coffee as a customer.

Wikipedia article quoting Lynch’s book, One Up On Wall Street

The individual investor may have more freedom to go against the herd and ascribe to their own contrarian beliefs.

If those aren’t reasons enough, then consider that active fund managers continue to underperform the S&P 500; meaning that individual investors can stand to gain more by just using a tracker/index than paying an expensive professional.

However…all investors, individual or professional, are subject to their own biases and weaknesses.

Picking individual stocks is hard even for the professionals. So if you can’t understand the balance sheet, you probably shouldn’t own it.

Peter lynch

My argument is not that the individual will outperform professionals.

Rather, I’m arguing that individual investors shouldn’t be afraid of investing if they think it’s a game only for professional investors on Wall Street. This was a misconception I had.

There’s a chance to make money if rigor, research and focus are applied. And probably a ton of luck.


There are certain games I will not play against Professionals.

These are games in which other players have unique leverage, for example in the form of capital and complexity. complicated trades, high frequency or algorithmic trading.

These are faster games I don’t have the resources for, and so I as an individual investor can focus on things that are slow and simple.

As a non-finance professional who hasn’t done his research yet, I acknowledge that my view of the investment industry and finance professionals may be extremely narrow.

Feel free to point out flaws and erroneous assumptions in my thinking.

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