How You Can Beat Professional Investors

It’s only natural for us to believe that individual investors don’t stand a chance against professional investors. After all, the pros have access to research capabilities, analytical support, and technology that individuals don’t. 

But if you’re an individual investor, you can still beat professional investors at their game. The trick is part patience, and part something else.

Long term investing

In Board Games, Coffee Cans, and Investing, I shared investment manager Robert Kirby’s Coffee Can Portfolio article that was penned in the 1980s. Here’s what I wrote in my piece: 

“In The Coffee Can Portfolio, Kirby shared a personal experience he had with a female client of his in the 1950s. He had been working with this client for 10 years – during which he managed her investment portfolio, jumping in and out of stocks and lightening positions frequently – when her husband passed away suddenly. The client wanted Kirby to handle the stocks she had inherited from her deceased husband. Here’s what happened next, according to Kirby:

“When we received the list of assets, I was amused to find that he had secretly been piggy-backing our recommendations for his wife’s portfolio. Then, when I looked at the total value of the estate, I was also shocked. The husband had applied a small twist of his own to our advice: He paid no attention whatsoever to the sale recommendations. He simply put about $5,000 in every purchase recommendation. Then he would toss the certificate in his safe-deposit box and forget it.

Needless to say, he had an odd-looking portfolio. He owned a number of small holdings with values of less than $2,000. He had several large holdings with values in excess of $100,000. There was one jumbo holding worth over $800,000 that exceeded the total value of his wife’s portfolio and came from a small commitment in a company called Haloid; this later turned out to be a zillion shares of Xerox.”

The revelation that buying and then patiently holding shares of great companies for the long-term had generated vastly superior returns as compared to more active buying-and-selling helped Kirby to form the basis for his Coffee Can Portfolio idea. He explained:

“The Coffee Can portfolio concept harkens back to the Old West, when people put their valuable possessions in a coffee can and kept it under the mattress. That coffee can involved no transaction costs, administrative costs, or any other costs. The success of the program depended entirely on the wisdom and foresight used to select the objects to be placed in the coffee can to begin with.””

The twist

In his article, Kirby also shared how he would use the Coffee Can Portfolio concept to build an actual portfolio. His solution: (1) Select a group of 50 stocks with desirable investment-qualities, (2) buy them all in equal proportions, and then (3) simply hold the shares for a decade or more. Kirby’s reasoning that such a portfolio will do really well has two legs: 

“First, the most that could be lost in any one holding would be 2% of the fund. Second, the most that the portfolio could gain from any one holding would be unlimited.”

But here’s the twist. Kirby did not put his solution into action, even when he thought it was a brilliant idea. There were two big problems. First, Kirby thought that the hurdles involved with assembling a team of investment professionals who can excel in constructing a long-term portfolio is too high to overcome. Second, there was massive career risk for him. “Who is going to buy a product, the value of which will take 10 years to evaluate,” Kirby wrote. 

The latter problem holds the huge edge that individual investors have over professional investors: There is zero career risk. After all, you can’t fire ourselves, can you? This means that individual investors can use the best portfolio management idea they have.

Earlier, I said that the trick to beat professional investors at their game consists of part patience and part something else. The patience bit involves the necessity of investing for the long run. The something else refers to individual investors not having to face career risk.

Stacking the odds

I first came across Kirby’s The Coffee Can Portfolio article a few years ago. I remember I was stunned to learn that Kirby was unable to act on a great investing strategy due to something (the career risk) that was not at all related to the effectiveness of the strategy. Individual investors have the luxury of not having to worry about this.

It is true that professional investors have a certain edge over individual investors in parts of the investing game. But not all hope is lost. Being able to invest for the long-term – a wise investing strategy, I should add – without career risk is a huge advantage that individual investors have over the pros.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.