Why a Small Investor Can Beat the Market But the Mutual Fund Manager Cannot

Pick up a copy of Money magazine or otherprice to drop as supply exceeds demand.
similar publications and read a few articles andFor these reasons, a mutual fund manager is at a
you'll find the conventional wisdom -- the retaildisadvantage to the small investor. Even if a
investor will not beat the return of the indexesmutual fund manager is a great stock picker and
over time, so don't even try. Just stick yourhas an expansive research staff. Even if she
money in a cheap mutual fund, such as an indextravels to all of the companies in which she
fund, and let it ride. The research will show thatconsiders investing to evaluate the business and
the large majority of professionally managedtalk to the management, she will always need to
mutual funds trail the performance of theirbuy more than her top picks in each market
non-managed index brethren, so there is nosegment because there simply isn't enough stock
reason to try to pick stocks.out there in a few companies to be fully invested.
This advice is absolutely true for managed mutualShe would end up being the only investor in the
funds. But there are investors out there -- manycompany and pay an enormous price to get all of
of them in fact -- who have been able to beatthe share she wanted. The mutual fund manager
the markets through managing their owntherefore ends up buying her first, second, third,
accounts. This was discussed in a 2005 article inand probably fourth pick, and buying shares in
Canadian Business magazine.market segments with which she isn't particularly
So, why is it that actively traded mutual funds,thrilled.
where a management team will scan through theBecause the fund manager needs to buy so
thousands of stocks and direct investor's moneymany different stocks to become fully invested,
in to their top picks, will trail a mindless index fundthe mutual fund ends up buying enough different
that just buys whatever is in the index? And whystocks to basically track the market. The portfolio
is it that individual investors can beat the indexwill therefore just track the return of the market
funds and the actively managed funds over thebecause it is the market. If Apple does better
long-haul? Ironically, small investors can be thethan Dell and gains market share it doesn't matter
mutual fund behemoths because they are small.to the mutual fund because it owns shares of
A mutual fund manager needs to stay fullyboth Apple and Dell. Even great investor Warren
invested most of the time, with little cash sittingBuffett has said that it has become very difficult
on the sidelines. If he doesn't, his results will laglately because he has so much money to invest
the market when it advances and investors wouldthat he can't be as nimble or as picky as he would
pull money out of his fund and go to someonelike.
else's who did at least track the market. WhoThe small investor does not have this trouble.
would stay in a fund that made 10% in a yearWith $10,000, $100,000 or even $1,000,000 to
when the market advanced 30%?invest a small investor can pick just the stocks he
Most mutual funds also have billions of dollarsreally likes and concentrate his holdings. When he
under management. They have so much moneybuys 1000 shares he does not even cause a
to invest that their investments can move thehiccup in the price of most stocks. A good stock
price of a stock one way or the other. If theypicker, with the emotional fortitude to stick with a
want to buy into a stock, they will run out ofplan through good markets and bad, can
sellers at the lower prices, causing the stock pricetherefore outperform both actively managed
to move up, forcing them to pay more for thefunds and the indexes. An investor who bought
shares. Likewise when they wish to liquidate a1000 shares of Microsoft, Apple, IBM, Home
position, as they sell traders will see millions ofDepot, and others would be a multimillionaire
shares entering the market for sale, causing thetoday.