Thursday 16 September 2010

The Advantage of the Individual Investor


The Advantage of the Individual Investor
(Part of a continuing series of periodic posts)

I read with keen interest an interview with the legendary investor Seth A. Klarman last night (Published in the September-October 2010 issue of the Financial Analysts Journal, Volume 66 No 5). One part that I reproduce below is very relevant for lesser mortals like you and me.
First, read this short paragraph from Klarman:

"Klarman: In our minds, ideal clients have two characteristics. One is that when we think we've had a good year, they will agree. It would be a terrible mismatch for us to think we had done well and for them to think we had done poorly. The other is that when we call to say there is an unprecedented opportunity set, we would like to know that they will at least consider adding capital rather than redeeming. At the worst possible moment, when your fund is down because cheap things have gotten cheaper, you need to have capital, to have clients who will actually love the phone call and—most of the time, if not all the time—add, rather than subtract, capital. Having clients with that attitude allowed us to actively buy securities through the fall of 2008, when other money managers had redemptions and, in a sense, were forced not only to not buy but also to sell their favorite ideas when they knew they should be adding to them. Not only are actual redemptions a problem, but also the fear of redemptions, because the money manager's behavior is the same in both situations. When managers are afraid of redemptions, they get liquid."
What does it mean for retail investors like you and me? Here are a few thoughts:
  • We don't need to outperform either the index or any specific "competing" investor / fund manager
  • We don't even need to outperform our own past performance
  • We don't need to be answerable to anyone other than ourselves
  • Nothing prevents us from holding a significant part of our portfolio in cash If we are either
    • satisfied with the profits already made or
    • scared about the comparitively high index levels
Do think about it!

Regards,
N


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1 comment:

Premium Finance said...

Thanks for sharing this wonderful finance story! This is very inspiring and I learned a lot.

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