Can Individual Investors Invest Profitably in the Stock Market with Value Investing?


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Jae Jun

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An anonymous user asked me to answer a question on quora the other day.

Wanted to share my short response as it’s a common question.

Plus, everyone has different experiences and ideas so I also want to hear from you at the end.

The Question

Can an “individual investor” invest profitably in the stock market using value investing / deep value investing strategies?

What I’m thinking is: there are many hedge funds and investors with lots of money who can afford consulting firms, well-equipped, how an individual investor can invest profitably in the stock market in spite of this?

Before getting to the question, I feel it’s always important to try and understand the intent of the question. There is always an underlying root to the question if you look hard enough.

First, the term “individual investor” is very vague but it’s obvious that this person is fairly new to investing.

Does this person want to start buying stocks using value investing methods?

Or is the question asking whether value investing works?

From the additional information noting the resources available to hedge funds and high net worth investors, I’m guessing that the person is also asking whether it’s possible to have an advantage over the big boys.

So with that context, here’s my answer expanded for old school value.

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Can Individual Investors Invest Profitably?

First, here’s a short background on me.

I come from an unconventional investing background because I never took any formal finance or business related classes. But this is quite common.

In fact, I disliked anything to do with finance and business. I had laser tunnel vision on becoming an engineer and that was that.

But life loves to throw curveballs and I started to invest in the 4th quarter of 2007 with about $5,000.

I lost more than half of it on bad advice but it turns out that this curveball was the best thing that happened to me.

about me page

I was led to believe by “smart money” and people around me that individuals can’t succeed.

But looking at the question above, as well as many other emails I get asking similar things, this is very common.

It’s easy to doubt yourself when everyone is saying that you can’t do something.

Do pros really have the education, resources, network and the inside tips that make them better than the rest?

No.

All that education, information and smartness can easily lead to overconfidence, information overload, bias and unneeded activity.

Just check out the story of Francis Chou and Guy Spier (giving away 3 free books – ending today)

You can invest successfully.

First step is to take whatever brainwashing the media and smart people have been telling you and flush it down the toilet.

Things like

  • you’re not smarter than us
  • we do this full time so of course we know what we are doing and you don’t
  • buy Buy BUY!
  • you need to watch stock prices every minute
  • IPO’s are great investments
  • you can’t make money by doing nothing

There are thousands of private investors killing the markets and the “big boys”.

In fact, you’re probably one of the top because so many hedge funds and mutual funds underperform.

The Strategy Doesn’t Matter as Much

The strategy you use to invest doesn’t matter.

I just chose value investing because it suits my temperament perfectly.

I know people who are awesome at what they do. And they could’t care about value investing.

What’s more important than the strategy is understanding the way you tick.

Then fixing the habits or putting yourself in a position so that you don’t fall into it.

And of course, hard work is required to be successful in anything.

But an important aspect that gets lost and forgotten among the talks of what stock to buy, is discipline and personal temperament.

Buffett is 84 years old but constantly studying and learning. But people also forget that he has a unique character.

That’s why there will never be another Buffett.

Individual Investors Can Invest Successfully

Another reason why part time investors are better than the pros is simply because of their ability to ignore the noise.

There is no pressure to outperform peers.

Focusing on stocks they know and understand is all they need to do.

Walter Schloss didn’t even attend college.

Yet he is listed as one of the greats and has the record to prove it. The biggest difference was his desire, perseverance, discipline and uncanny ability to go at it on his own.

I’ve met retired folks who have achieved 20+% annual returns simply with less activity.

Basically the Warren Buffett way.

Did you notice that I didn’t bring up any talk of financial analysis, mathematical or analysis skills.

I know there are many people who don’t use stock valuation spreadsheets like I do.

I use it for the purpose of saving time and getting more done.

But you don’t need tools to be successful. It helps, but it isn’t necessary.

Graham and Buffett never had CNBC to tell them stock prices or the SEC website to get live updated filings.

Investing is a game where you don’t need to be the smartest person in the room.

That’s why anyone can do it.

Invert, Always Invert

This question is more suited when you invert it.

Why can’t “individual investors” invest profitably using value/deep value strategies?

No reason at all.

If you don’t want to put in the effort and think the stock market is a lottery machine, then chances of success is limited.

However, there is no reason why individual investors can’t be profitable.

What About You?

What do you tell people when you get asked this question?

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3 responses to “Can Individual Investors Invest Profitably in the Stock Market with Value Investing?”

  1. Renaud M says:

    Excellent wrap up for those who are starting

  2. frankiethepunk says:

    Yes, I absolutely concur with Jae’s article. In fact, the number one rule I would state is to DO YOUR OWN THINKING. You don’t have to be a genius to be a successful investor, but it is important to educate yourself and figure out what works and what doesn’t work.

    Here’s are several tips that will save you 30 years of chasing elusive profits.

    1) Technical Analysis DOES NOT work. You will have the ILLUSION of making money but after all that buying and selling you’ll just about break even.

    2) Value Investing DOES work. Its a completely different philosophy and its based on fundamental business principles that have been passed down for 3,000 years.

    3) Character is more important than intelligence in successful investing. Character can be defined as hanging in there and buying more, when the stock market declines by 50% because you know you’ve done your research and the companies that you are buying are fundamentally strong so the Stock Market has just handed you a gift, buy discounting their stock price.

    You also have to have the humility to admit you are wrong. Huberis is the biggest folly. Don’t worry, if you are honest with yourself you will learn when you are right and when you are wrong. Its that process the process of figuring out what you have done wrong that will make you a better investor.

    4) Read everything that Jae says, and particularly read all the books he recommends on his website. You will learn more in a two or three years than many people learn in 30 years of investing. (Take it from me.)

    5) Once you’ve put everything together intellectually, you’ll realize that Jae’s spreadsheets are amongst the most powerful analysis tools available to investors (professional or amateur).

    6) As a small amateur investor, if you know what you are doing, you will actually beat the pants off the professionals. Warren Buffett has admitted to this. Size is their biggest disadvantage. Once you get too big it is VERY difficult to beat the market. However, if you have a small portfolio you can generate better returns than the big boys.

    Lastly, success, is sometimes more about what you DONT do vs what you do do. If you can just resist the temptation (and believe me it will be hard to do) of frigging around with your portfolio constantly and just allow them to grow, you will be able to grow significant wealth over time.

    Best of luck (all though you don’t really need it) to your investing activities.

  3. Really great points.

    I like the way you touched on characted. I only alluded to it but you are spot on. I’m constantly trying to improve and build a better character because I still make mistakes, but investing is lifelong process.

    There are some other books I have on my reading list I need to get to. It was a highly recommended book by a person I look up to so I need to get on it and let you all know what I think.

    Great comment again.

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