I often find myself thinking “why do I think I’m so special?”. What I really mean is that there are many compelling reasons to not pick individual stocks and many studies that point out that even “professionals” can’t beat the market on average. This could definitely hold true for me in the long run, if I fall for some very common pitfalls that get dumb, smart and professional money alike.

There are several advantages that individual investors have that are often overlooked by these studies and if you know about them, you can incorporate some or all into your portfolio decisions.

1. You don’t need to think of your portfolio like a fund manager or portfolio management professional does. You aren’t held to any requirements for reporting and don’t have to attract new money to extract more and more fees from. This means you don’t have to try to consistently beat the benchmark. A lumpy return that beats the benchmark some of the time can provide amazing returns in the long term.

2. You don’t have to be crazy diversified. Holding 20 or 30 businesses is more than adequate. This is especially true when the businesses are not in the same geographical areas, sectors or tied to the same economic factors. You also don’t need to be in every sector or area. Remember, big funds will try to own a little of whatever the hot sector or country is at the time. No one is forcing you to own Brazilian financial services companies, so just don’t.

3. Another advantage you have as an individual investor is that, in most cases, you aren’t relying on your equity investments for anything in the short term. If you need a downpayment on a house in 12 months, stocks is not where you should be parking that money. The flip side to this is that you can save a portion of your income every month and make new investment decisions. Again, you don’t need to think of portfolio management principles here. Make the decision based on every option available. Don’t see anything you want to buy? Just hold the cash and keep looking. with no performance that you are being judged against, sitting on some cash isn’t going to make you any worse off in the long run.

4. As a small investor, don’t limit your universe to mega caps making headlines on CNBC. There are so many micro cap and small cap names under a billion dollars that just can’t be bought by large funds for liquidity reasons. They can’t compete with you in these small names. A lot of small caps are also easy to understand businesses with founders at the helm. Do your own research and try not to chase garbage companies with the hopes of hitting it big (penny stocks, exploratory miners, etc.). Look for the same qualities that you find in the bigger long term compounders or a small company that dominates a market niche.

5. The coffee can portfolio can be utilized with small companies as an individual investor. Buying reasonably priced and growing small companies with some potential to reinvest for a long time is a feature of the coffee can portfolio and as a small investor, you can do this. One way to do this would be to find one or two of these a year and put some amount of your savings into them, never to touch them again. In 20 years some will be zeros and others will have single handedly paid for your retirement. Check out my write up on 100 baggers!

6. As an individual you have the ability to choose unpopular sectors, geographic regions, etc. No one will be taking their money elsewhere when you decide to do this. Again, the same is often not true for professional funds which will need to answer for the choices they’ve made.

7. Do it if you enjoy it. You aren’t doing this as a job in most cases as an individual. Professional money managers may get tired of the grind but still need to collect the paycheque. If you get tired of it, no big whoop, stick it in an index fund and forget it.

Follow me on twitter @MoS_Investing

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