In an age of high frequency trading and huge hedge funds it would seem that the individual investor would be at a distinct disadvantage. On the contrary one could argue that now is in fact the best time ever to be an individual investor. Joe Terranova a series regular on CNBC’s Fast Money and the Chief Market Strategist at Virtus Investment Partners makes this very case in his new book Buy High, Sell Higher: Why Buy-And-Hold Is Dead And Other Investing Lessons from CNBC’s “The Liquidator”.
In the following excerpt from the book Joe notes the many advantages that individual investors have over institutional investors. That is not to say that individual should try and copy the strategies that institutions use. In fact Terranova argues that individuals should put some very clear constraints on what they are willing to do in their portfolios. In short, “don’t invest just to invest.”
From Chapter 3, Keep An Investing Calendar, Buy High, Sell Higher by Joe Terranova
There is another important lesson here, and this is one that some experts would disagree with: individual investors have an advantage over institutional investors. Institutional investors trade other people’s money. Because of that, they have to move carefully in light of information that comes out of event days. I don’t want to be an institutional money manager. I like to trade my own book, and I prefer to invest my own family money. I think most people reading this book are in the same position—they’re investing for themselves and their families. Because of that, individual investors have an edge that they often don’t realize: they can be more nimble than institutional money managers. Still, investors should not make snap judgments, though they can move with or ahead of the institutions that have to wait until their investment committees make a decision.
In fact, I suggest that all investors give these macro decisions a grace period before making an investment decision. Let’s look at this from another perspective: What have you got to lose by waiting until the markets settle down? What is it exactly that you’re missing in that time period? If an FOMC or unemployment report is released, and you suffer losses well beyond what you normally should in your portfolio, then your portfolio was flawed in its construction to begin with. Your portfolio should be able to withstand a grace period of a few minutes, a few hours, or even a few days.
So for example, and just to reiterate these investment tenets: Regarding the FOMC data, wait until the second day after the report is released to make an investment decision (if released on Tuesday, don’t invest until Thursday; if released Wednesday, don’t make a decision until Friday). Mark that on your monthly event calendar. On the monthly unemployment report, wait until the following Tuesday before making an investment decision. Mark that on your calendar, too.
I have been asked whether the same rules apply to earnings releases. The answer is no. An FOMC decision is a macro event, but an earnings release is not. Earnings releases are stock‑specific events—micro events—so the same guidelines do not apply. Earnings releases provide a specific set of fundamental information that investors can quickly digest and act upon. This is where you can take advantage of the institution because you’re more nimble. In a sense, if you make the right decision, you’re going to get ahead of the institution. As a general rule of thumb, institutions are like battleships: it’s difficult to move a battleship with any speed. As an individual investor, you’re going to move before the large, lumbering ship, and you’re not going to get caught up in those big waves that he’s going to create. So when it comes to earnings releases, grace periods do not apply.
Grace periods do apply to macro events that have a binary effect on equities and bonds and currencies and commodities. By binary effect, I mean an event in which everything is correlated and moving in the same direction. For example, in the moments after an FOMC decision or an unemployment announcement, the market usually has a knee‑jerk reaction either up or down, often by a significant margin in either direction. The whole market goes one way or the other. That’s what I mean by a binary effect.
What is the overall lesson here? Patience is an essential component of successful investing. People are compulsive by nature. It’s easy to overreact to events and, as a result, to overtrade. I speak from experience because there have been many instances in my career when I traded too much. It is almost always more difficult to sit on one’s hands and do nothing. Today’s electronic platforms, which are a relatively new phenomenon, make investors more compulsive, whether they’re on an electronic trading screen or in a trading pit, or working as a day trader. Even the doctor who sees a full day of patients but ducks out of the office every couple of hours to check his portfolio with his Morgan Stanley wealth advisor is compulsive. And I know from experience that compulsive behavior will have a negative effect on your investments and portfolio performance.
By placing restrictions on my traders, I forced them to make better, well‑considered decisions. You can—and should—do the same by placing similar restrictions on your own investing. Don’t invest just to invest. Choose your shots carefully. Plan your monthly event calendar and use it to implement your week‑to‑week strategy.
This is an excerpt from Buy High, Sell Higher by Joe Terranova. Copyright © 2012 by Joe Terranova. Reprinted by permission of Business Plus. All rights reserved.