Investing (and trading) is one the few in modern life where amateurs (individuals) can compete directly with professionals (institutions).*  One can argue that the playing field is less than even, as has been done many times with high-frequency trading.  But by and large individuals and institutions compete in the same arena when it comes to stocks, options and even forex.

Unfortunately for individuals one area where it is prohibitively expensive to compete is in the realm of bonds, specifically corporate bonds.  In an earlier screencast we discussed the situation surrounding the bonds of BP (BP).

The point being that institutions are sniffing around the bonds of the troubled oil giant.  Finding, researching and trading the bonds of a company, even as big as BP, is simply out of reach for individuals.  So it sounds like distressed debt investing and capital structure arbitrage are better left to the hedge funds and big institutions.  So what?

Individual investors have some distinct advantages over institutions.  Most institutions need to be acutely aware of the indices against which they benchmark.  Individuals, on the other hand, are beholden only to themselves.  The performance of the S&P 500, for example, should be but a data point to an individual.  Many institutions need days to enter (and exit) their equity positions so as not to move a stock’s price.  An individual can do this (usually) in seconds.  Maybe most importantly individuals don’t have clients breathing down their necks.  As an individual investor you are your own client.

The point is that individual investors should look less at trying to invest like an institution and focus more on the advantages of their situation.  Most institutions can’t take meaningful positions in small cap stocks.  Individuals can. Most institutions can’t undertake options strategies.  Individuals can.  Most institutions can’t day (or even swing) trade.  Individuals can.  Maybe most importantly an individual doesn’t need to trade (or invest) if the set-up isn’t right.  Most institutions are hemmed in by their need to “fully invested.”

Are there real downsides to being an individual investor (or trader)?  Sure.  However as the Internet continues to democratize the flow of information these advantages are becoming smaller.  Individuals should play to their strengths, stay nimble and focus on the (absolute) returns that matter to them most of all.

*$10,000 does buy you a seat at the World Series of Poker No-Limit Hold’em Championship.

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