Small but Mighty: How Individual Investors Can Compete With Large Institutions

Institutional Investors.  These are the big wigs as far as investors go.  They invest money for themselves, for other institutions (e.g. endowments, pension funds, etc.), and typically have billions of dollars at their disposal.  This enables them to buy a majority stake in any S&P 500 company, and if they feel like having a chat with the CEO, or commanding a seat on the Board, both are just a quick phone call away.

How are individual investors supposed compete with these guys?  Such a matchup must be akin to my high school football team taking on the Green Bay Packers at storied Lambeau Field.

Actually, no.  As individual investors, time is on our side.  Managers of big institutional money are often hired or fired based on short term performance.  If fund performance lags for a quarter, assets could leave in a billions-of-dollars-overnight kind of way.  This means there’s little opportunity to go hunting for deep discount investments in out-of-favor companies that could outperform in the next market cycle.  All their investments need to perform, right now, or they’re getting cut.

Also leveling the playing field; detailed financial data is more accessible than ever before.  Individuals can now dial into quarterly investor calls and access real-time data online in just a few seconds.  For a few thousand dollars a month, anyone can order their own Bloomberg computer terminal – identical to the ones institutional investors use.  Individuals who go this route see the same company data at the same time the institutions do.

Investing enormous sums of money comes with unique challenges.  Institutions have to contend with rules and disclosure requirements concerning how much of a company they own.  Additionally, institutions are often buying so many shares at a time, they can actually drive the share price up on themselves.  That means building or unwinding an investment can take them days or weeks, not seconds.  Moreover, it’s difficult to invest in anything but larger businesses, as only larger companies have sufficient market capitalization to absorb an institution’s equally large investment.

So, don’t think just because you’re an individual the cards are stacked against you.  Being an institutional investor comes with some perks, but also challenges that individual investors don’t have.  In fact, there’s a good deal more on your side than you may realize.