This is a weak article. There are plenty of ways to beat the market averages while being just one individual with a small sum of capital.
A while back Buffett said that he thinks he could average 50% annually if he only had a small sum of capital. Here are some of the things he would likely be doing:
1. Go where the big investors can't
Many large institutional fund managers cannot go below certain market caps. Typically you can find a rich hunting ground of undervalued and ignored companies below $100M.
During the crisis I found it pretty useful to actually screen for negative enterprise value stocks. These were companies where they were trading BELOW the cash they had on their balance sheets. (EV = Market Cap + Debt - Cash). Some of these companies were pretty tiny, $10 to $50M mkt cap, but they worked out well. You have to be willing to deal with illiquidity though.
2. Odd lot tender offers
You can find situations where a company wants to go private and delist. To do that they need to buy out shareholders and get below 300 public shareholders. To do that sometimes they will pay a premium for you to tender shares if you have below 100 shares. Again, this is an area where a small investor can do well but where large institutions are precluded from being active.
3. Look for areas where institutions are forced to sell
Spinoffs are the classic example. Academic research has shown that spinoffs will in general outperform the greater market. Why?
Many index funds are mandated to only hold stocks that are a part of the index. Sometimes an index member will spinoff a smaller unit which cannot make it into the index. The index funds will be forced to sell that company and so its pricing may get below its actual value. That's why spinoffs tend to outperform the market in their 2nd and 3rd year of trading.
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There are plenty of other areas too. These are just a few but it is all pretty well publicized.
Fascinating. I imagine you are ludicrously rich via these obvious and well-publicized methods? How long did it take you to learn and implement these tactics? I would also love to see pictures of your yacht and/or Mansion.
you're still taking on the risk of waking up one morning to an accounting scandal rendering 5% of your portfolio worthless. unless you diversify so much that you're essentially an index investor anyway. the stock market isn't rigged against retail investors like many believe, but people are far too quick to assume a few years of good performance means they're "beating the market".
When it comes to picking out frauds, you can usually tell by looking at the accounting who is playing loose and who is not. That wont give you an indication of whether or not a company is necessarily a fraud, but it will give you the opportunity to know who is being aggressive with their accounting. And if they are being aggressive you should probably stay away.
There are a ton of books out there on forensic accounting (Financial Shenanigans, Creative Cash Flow Reporting, Quality of Earnings, Financial Fine Print -- Along with changes to GAAP and IFRS) where if you have read all of them you should be able to pick out weird issues with accounting.
The other benefit of investing in small companies is you can in general get better access to CEOs and managers. If you were to invest in JNJ, the chance of you getting to talk to the CEO is slim. But with a lot of nano-cap companies you can actually go visit with the CEO and start quizzing him to see if he is BSing you or if he is actually smart and competent. I like to ask the same questions to two competing CEOs and see how their answers differ. You can really go as deep as you want when investigating some CEOs. You can start visiting their community, talking to people who are active with them in organizations. Just a lot of work to really scrub their background and get at who they are. Plus, these businesses tend to have fewer moving parts too, so you can analyze them in greater detail.
If you actually want to trade, be sure to go for a broker that has a decent real-time simulator. optionsxpress does. Trade on that for a while, always comparing against an index, and see whether you can actually beat it over a signficant amount of time. You probably cannot.
A while back Buffett said that he thinks he could average 50% annually if he only had a small sum of capital. Here are some of the things he would likely be doing:
1. Go where the big investors can't
Many large institutional fund managers cannot go below certain market caps. Typically you can find a rich hunting ground of undervalued and ignored companies below $100M.
During the crisis I found it pretty useful to actually screen for negative enterprise value stocks. These were companies where they were trading BELOW the cash they had on their balance sheets. (EV = Market Cap + Debt - Cash). Some of these companies were pretty tiny, $10 to $50M mkt cap, but they worked out well. You have to be willing to deal with illiquidity though.
2. Odd lot tender offers
You can find situations where a company wants to go private and delist. To do that they need to buy out shareholders and get below 300 public shareholders. To do that sometimes they will pay a premium for you to tender shares if you have below 100 shares. Again, this is an area where a small investor can do well but where large institutions are precluded from being active.
3. Look for areas where institutions are forced to sell
Spinoffs are the classic example. Academic research has shown that spinoffs will in general outperform the greater market. Why?
Many index funds are mandated to only hold stocks that are a part of the index. Sometimes an index member will spinoff a smaller unit which cannot make it into the index. The index funds will be forced to sell that company and so its pricing may get below its actual value. That's why spinoffs tend to outperform the market in their 2nd and 3rd year of trading.
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There are plenty of other areas too. These are just a few but it is all pretty well publicized.