The best part about financial markets is the mythos that the amateur can compete or even out-compete the professional.
How many other ultra-competitive activities does that hold true? Would you step onto the field against an NFL team? Would you wager millions of dollars playing against a chess or golf pro?
Arrayed against you is an army of PhD-wielding mathematicians, economists, and artificial intelligence researchers, backed by another army of programmers that turn the first group’s insights and data into algorithms that get the best executions and take advantage of fleeting market opportunities in fractions of a second.
So why do you think you can outcompete a finance professional? And I mean a real one – a buy-side hedge fund like AQR or Renaissance Technologies or institutional asset managers like Blackrock or Goldman Sachs, not your typical “financial advisor” who is scrabbling for a ten or fifty thousand dollar 401k rollover.
How do you compete?
As an individual trader you have 3 edges:
- Smaller pools of capital: you can have tens of millions of dollars and still be a very small fish that with a little care doesn’t have to worry about moving most markets with your order flow. You can get in and out of investments faster than any institutional investor. While they may be faster than you on the execution of any single trade, you’ll almost always be faster when it comes to large-scale portfolio repositioning.
- Patient capital: if you trail your index by five years it’s not like you’ll have the capital you’re trading with yanked away from you; however, if an institutional investor trails their index by five years, whoever owns that capital might transfer it to another financial institution to manage. This allows you to be patient and let your investment or trading thesis play out without worrying about career suicide. Most portfolio managers can’t afford to do this.
- You don’t have to do something that appears complex or fancy to justify your fees to your clients. You can invest in simple index funds and beat 80%+ of active portfolio managers.
How does Signalee apply these edges?
- Signalee doesn’t have the infrastructure or knowledge to compete with high-frequency traders so we only play in areas where speed of execution doesn’t much matter.
- We ignore the traditional concept of risk that substitutes volatility for the permanent loss of capital.
- We use a trading strategy that accomplishes our goals – not someone else’s.
For the average investor, focusing on things they can control like investment expenses (including taxes), diversification, and their savings rate, if they’re still in the accumulation phase, is a much better use of their time than trying to find an edge in the market when the playing field is crowded with more capable competitors.