Monday, February 27, 2012

Should retail investors stick to value equity investing to safeguard careers?

When I refer to 'retail investor', I do not imply any maximum level of knowledge/skill/expertise/experience, but only refer to a person who does not intend to make investing his full time profession. Hence, even a MBA Finance from a top notch college who aced his investing courses/simulation games, would be a retail investor if the main job is anything other than full time investing. Now, there are many investing styles for the lay investor, and in comparison to derivatives, exotic asset classes like art/commodities etc, the slow compounding effect based conservative value investing style may not appeal to many people, atleast not in the short run. But the perils in any other investing style is(especially the last point)
  1. Disadvantaged in terms of information recency/execution speed and costs:-Without multiple terminals, access to recent data feeds and cheap trading costs, a retail investor is disadvantaged compared to his institutional counterpart. 
  2. Information asymmetry widening:- In equities, the level of analysis is much lesser(DCF etc) as compared to options/FICC wherein pricing models accuracy matters as well. The improvements/refinement in those areas are much more prevalent and frequent, hence someone not having access to those would be at a disadvantageous position.
  3. Limited structures/market access/positions:-Institutions by virtue of their market access, lower margin needs and liquidity can access more markets than retail investors, who are therefore better off investing along with them via structured notes/fund of funds etc.
  4. Distraction from 'core'/'ongoing' business/career:-My father's friend who has a ball bearings business and who dabbles in stocks, once confessed that if he had focused on his bearings business, he would have been much wealthier than he is today. This is much more true in professions, with an entry of young often better trained blood. If you are not on your toes/upto speed, there is risk of permanently being left behind. And that is an intangible damage which no amount of investing success can compensate for. For day trading, F&O etc, that needs a lot of time commitment/intra day distraction and BP/pulse rate tracking the market. That does take a toll on one's performance at work. 
  5. Value investing inherent advantages:- By contrast, value investing needs a one time major time investment, and then not so much effort at monitoring. Also, it is not very time sensitive job, so does not affect your work performance. Plus, the playing field is much more level(in fact retail investors even have an advantage as they do not need to report to someone/less herding risk etc). 
Of course, to 'get rich fast', it either needs a great career with bonuses, or else great trading gains/informed investing. While selecting the path, one would be advised to consider the above points.

No comments: