A Former "Fundamental Investor" Speaks Out

"It's not who you are that holds you back... It's who you think you're not."

- Unknown

Why you should leave the Fundamentals to the Big Boys (and Girls, of course)

First, let me introduce myself . . . I'm the wife of "The Simple Trader."   

Second, let me tell you what I did before my now all-consuming job of being a stay-at-home mom to our two precocious (oops . . . i meant precious) little boys. I was an equity [stock] analyst on the sell-side, and subsequently worked at a major mutual fund shop where I contributed to, and eventually co-managed a fund that focused on small and mid-cap growth stocks... so called SMiD stocks.

To say that I lived and breathed the "fundamentals" would be an understatement.  To say that I was skeptical of day traders and others who let the charts dictate their strategies, my husband included, was an even greater truism.

Don't tell him I said that. 

I'm still a firm believer that one of the best ways to generate good risk-adjusted returns is to identify companies with long term growth potential, and participate alongside management as they unlock that potential.  I know that sounds like the traditional "buy and hold" strategy using fundamentals to guide your investments, but bear with me for a minute and I will explain why I now, with some distance from my own experience, and a bird's-eye view of my husband’s work and teachings, see that individuals need to apply that methodology differently than institutions. 

Or take a totally different approach altogether.

Let me start by saying that the fundamentals game is rigged against the individual investor.  And, no, I am not calling out my old profession in some kind of conspiratorial, all of Wall Street is evil, self-consumed and greed-filled, rant.  I just mean that mutual funds, hedge funds and other institutions like them have several key advantages that you, as the individual, will likely never have.  

  • First, the "professionals" are dedicated to following specific sectors, and many of the individual companies within those sectors, full-time.  They are immersed in the dialogue surrounding their stocks and sectors all day, every day. It's what they get paid the big bucks to do.  For the most part, they don't have inside information, or some private cell phone number of an insider (although clearly some do).  But, they do meet with company managements, industry sources, competitors, customers, suppliers, etc. on a regular basis, which gives them a huge leg up when it comes to putting the mosaic together faster and more completely than you and I ever could on our own. 

  • Secondly, they all talk to each other, and know how/what each other thinks.  I used to joke that the stock market was one big game of telephone, and by the end of the day, the last buyer/seller combo had finally gotten his or her call and was in on tail end of the group think of the day.  Not surprisingly, the bigger, more important players in the marketplace are at the front of that proverbial call list, while, you guessed it, the individual is last, or, more likely, not on the roster at all.  For the most part, by the time the individual gets in on the conversation, the major move in the stock has occurred. 

There's another key difference worth noting . . . 

Many of the largest asset managers (mutual, not hedge funds, obviously) are required to be fully invested, and are benchmarked against an index. The individual investor is clearly neither. 

This is not a minor distinction.

If you, as an individual, were required to put every dime of your portfolio to work at all times (i.e. could not wait for a good entry point to purchase the stock of a good company, but rather had to deploy your cash immediately), or if you could actually retire on your relative performance (i.e. the market is down 10%, you are down 8% . . Winning!), then I'd say go ahead and find good companies (assuming for a second that you could do this as well, or better than the institutions can, despite the aforementioned reasons pointing to the contrary), buy their stocks when you find them, and hold them until retirement, or at least until they reach your targeted return. 

Much to my dismay, I have yet to find a way to spend relative dollars, and you can ask my husband . . . I would if I could.  I suspect that you can't spend relative dollars either... but if you find a way, please be sure to reach out. We should talk!

All kidding aside, the point is, you should not try to take a page out of an institutional investor's handbook without understanding the context surrounding their techniques.  Yes, institutions have advantages in the buy and hold game, but they also have structural reasons to promote it as the best approach as well.

OK.  So what can the individual investor do other than hand their money over to the professionals to manage, or lose it to them in an unfair fight? 

You can flip the script and use your advantages.  

You are small.  

You can be nimble.  

You don't HAVE TO be in the market.

You can let lower time frame charts dictate your entry and exit points, versus being forced in and out of the market by your daily cash inflows and outflows.  

In other words, you can be a TRADER.  

Trust me, the institutions would love to be able to more effectively trade [time] stocks that they fundamentally believe in.  And, some do, on the margins, but the bigger they are (in assets under management terms) the more difficult that is to do, especially in illiquid names.  

So, go ahead and do your research, or use someone else's research to come up with a list of names to trade, or don't trade stocks at all, trade index futures like my husband.  The point is, don't try to beat the professionals at their game . . . choose a different game, one that is rigged in your favor.  

As my husband would say… “Yeah, I said it…”


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