It's an argument that has been raging, debated and written about for years! Are private investors as effective and successful as the professional money managers who make their living handing out expert advice?
We're all aware of the big names – Warren Buffett, John Templeton, David Dreman to name just a few – and their outstanding share market successes. Then there are the fund managers who are paid for their advice and purport to know things that we don't.
Are they really so much better than us? Why can't we mere mortals be similarly successful? Do they have secrets we should learn?
It's really a matter of time
Perhaps the biggest difference between the amateur investor and the pro is the amount of time we ordinary people can devote to analysing the market and the mass of information that is available to us.
If you can find the time to 'do your homework' on the market, there is no reason why the man on the street can't match the performance of the expert fund managers – especially when you deduct their charges from the profits they earn for you.
Over time, only the most successful professionals have achieved returns over and above the share market, but these have only advantaged a mere 1 or 2 percentage points. Not a great advantage
Size doesn't matter to you
You are not going to be penalised because of the size of your share portfolio. But because the size of their funds under management determines the fees professional money managers can charge their clients, they operate with another motive that doesn't necessarily relate to your best interests.
They are also bound by red tape that requires them to match their portfolio to the index they are following. This can affect the fund manager's performance by restricting the deals they can do and forcing them to own particular shares to match the index.
A manager will be viewed as taking on excessive risk if he strays too far from the index.
In short, they often can't operate with the freedom you enjoy.
The bear market – bad news for professionals
As funds fill the coffers of the successful money managers in a Bull market, most funds are required to invest in shares that have become more and more expensive. This at exactly the time that private investors would consider taking a profit and selling the same shares.
Should the market turn to take on more bearish characteristics, share prices fall and many of the better stocks suddenly look like bargains. The fund managers are then compelled to sell, just when the private investor would be more likely to buy.
These market changes are bad news for the pros but can be great for the amateur investor.
So who is better?
Clearly, there is a place for both the private investor and the professional in the share market. Each has its advantages and each has its limits. I personally lean a little towards the private punter. What do you think?
