My Edge

I've been pretty busy the last 4-5 days, so I apologize for the lack of updates (see my poker blog for why I've been busy). Someone asked me the other day what my 'edge' is in investing, and why I feel spending the time managing my own money is more important.

I really think my current edge is two fold. I'll be up front and say that I don't think I'm better than a professional, but I expect that on a year to year basis I'll make more money than if I handed my funds over to a professional. Sounds counter-intuitive, right?

Not really. I feel my first 'edge' in investing is that I care about my money more than anyone I'd hand it off to. It seems simple, but when I hand my money over to a mutual fund investor or a hedge fund, there are other concerns that they have than simply making me the most money possible. Mutual funds are constantly concerned with bringing in new money. They get all their money in fees when you deposit in, but are not compensated at all based on performance. Now obviously when they perform better they bring in more money and get more fees, but the nature of their business tends to make them very risk averse and also leads to them doing some very artificial things (using their funds to walk up stocks they have existing stakes in at the end of quarters for instance) to boost performance for a given quarter. Mutual funds are also for the most part only allowed to own stock, not short it or use options. They also are required to keep a certain amount of their money invested at all times, regardless of market conditions.

Hedge funds are a bit different, since they are compensated based on their performance. The good ones tend to perform quite well, but they take a lot of your returns in fees (usually in the 20% range) both realized and unrealized, plus there is often a large barrier to entry (most have a minimum investment requirement in the 7 figures). They also have to deal with year end redemptions (when investors are allowed to 'cash out') which often leads them to sit on their performance if they have a good first 9-10 months and just try and preserve their lead the last 2-3 months rather than maximizing their return on invesment at all times. Hedge fund investors tend to care too much about day to day and even week to week performance as well, so they often won't put a lot of money into investments that may take some time to develop that may have great returns longer term.

I'm generalizing, and this certainly isn't true for all of them, but quite simply I believe my first edge is from the fact that I care about my money more than anyone else does, and anyone else I give my money to has motives other than just making me as much as possible.

My second edge I believe is mobility. Large institutions (in this case, mutual and hedge funds) swing around hundreds of millions or billions of dollars. When you move that much money around, you can't get in and out of positions without impacting the price, and finding buyers or sellers for everything you want can be complicated. The fact that as an individual investor I can move in and out of positions on a moment's notice without impacting the stock price is a huge advantage. I'm not even sure I can properly express what a huge advantage this is. A big mutual fund will take months buying their full position a little at a time as to not walk up the price to such a point as to not make a profit, and it can often take them weeks/months to sell positions too, often tanking the stock price in the process. I can start and close a position in the same day and not impact anything. This mobility gives me opportunites that don't exist for institutional investors.

With a lot of the new laws out there, the playing field is more level than ever for the individual investor versus the institutional investor. I'm not naive enough to think there isn't any inside information or tips that go around professionals get that I'm not privy to, but I think the advantages outweigh the disadvantages. I don't think it's for everyone, and I think a vast majority of people are better off leaving their money to professional. That being said, I believe if you have the time, inclination, and proper mindset for money that you're better off managing your own money than letting someone else do so.

In my first six months of investing I outperformed many hedge and mutual funds. Six months doesn't prove much, but I have very little doubt that with the right mind set and discipline I can continue to beat the averages and after fees do better for myself than the professionals I used to let manage my money did.

-Rizen