Editor's note: Today, we're taking a break from our usual fare to share a message from Austin Root, editor of our American Moonshots publication. In this essay, he reveals how to use your biggest advantage over the investing pros...
Can individual investors compete with the big guys?
Legendary value investor Benjamin Graham thought so. In fact, he argued you could beat them...
I am convinced that an individual investor with sound principles, and soundly advised, can do distinctly better over the long pull than a large institution.
That quote was from 45 years ago. A lot has changed since then that seems to favor the institutions over Mom and Pop... For one thing, financial markets are dominated more and more by just a handful of huge firms.
And yet, I agree with Graham. No one is better positioned to beat the returns of these investment giants over the long run than you.
Let me show you what I mean...
At the end of 2018, the world's three largest investment managers – Blackrock, Vanguard, and Charles Schwab – managed more than $15 trillion combined. By comparison, the entire U.S. stock market was worth $30 trillion at the time.
Ten years earlier, those three firms managed about one-fifth of today's amount, or just $3 trillion. (The S&P 500 Index went up about 178% between then and 2018, meaning that most of the asset managers' growth came from market share gains.)
The thought of going up against all that capital is daunting. And individual investors may feel that the investment game is stacked against them for other reasons, too.
Institutions employ scores of analysts and economists to crunch numbers. They use vast amounts of quantitative computing power and proprietary trading algorithms. They have access to investments you probably don't, such as IPO shares before they trade or high-frequency trading strategies.
But consider your advantages...
You don't report to or cater to outside investors.
You won't end up over-diversified like most institutions, with countless strategies and portfolios watering down your returns.
And you won't invest too much in passive strategies, which typically buy whatever stocks make up the biggest percentage of some index – whether they're good businesses or not.
You also won't move the price of a stock much when you're entering or exiting a position like the big guys do. (Recently, a friend of mine who's a portfolio manager at Capital Group – a manager with $1.9 trillion in assets – admitted that his company needs to bake in a 10% price decline to any major investment when it decides to exit. You won't have that loss to overcome.)
But most important... you get to harness the real secret to beating the big guys. It's so simple. And yet it's a strategy that the big institutions can't – and won't – follow.
The best way to produce truly life-changing gains is to invest early and stay invested for the long term.
We believe one strategy can help you capitalize on all these advantages...
In December 2018, we built the first American Moonshots portfolio to help find the small, high-quality, high-growth companies that could turn a modest investment into a huge nest egg.
These are the tiny stocks that fly under the radar. As a rule, big money managers can't move their vast investment funds into small companies with "moonshot" potential... And they can't stick around long enough to watch them grow.
Those are just a few reasons these opportunities are essentially "off the table" for the big guys. And that's great news for individual investors.
Small-cap stocks tend to be more volatile in the short term. But they materially outperform larger companies over the long term...
For example, over the past 25 years, the S&P 500 has produced a return of more than 1,000%, assuming reinvested dividends. The S&P Small Cap 600 Index is up nearly 1,400% in the same period.
By getting into the quality companies before they experience huge growth, you have a real edge over the institutional investors... and a chance at incredible upside.
Now more than ever, we are confident there are life-changing moonshots out there for the taking. For Graham's "soundly advised" individual investor who employs "sound principles," we see big gains ahead.
Editor's note: The top-performing "moonshot" stocks of the past 30 years could have each turned every $1,000 invested into $150,000 or more... And as it turns out, these companies had one specific trait in common. Learn more about this key to profitability – and how you can get in on three new moonshot opportunities that Austin is releasing on Monday, if you act now – by clicking here.