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