If you’ve tried to make money in the stock market here are things you already have heard 1 million times… they’re cliches, axioms, laws, whatever you want to call them.
This letter will go through each one of them, but explain why it may not matter at all for you specifically to make money.
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But first, here they are.
Market Cliche 1. - No one can beat the market
Heard this before? Even the best hedge funds in the world don’t beat the market consistently.
Sources, see the buffet wager, see general hedge fund performance charted against the S&P, see tony robbins 800 page book basically explaining that because you pay fees to advisors it ruins your compounding effect over a liftime.
These are all TRUE, but don’t necessarily apply to you, the retail investor.
Don’t Try and TIme the Market - It’s Impossible
Again, this is true broadly, but probably not true in specific cases. We’ll see why in a moment.
You Can’t Compete With Hedge Funds and High Frequency Traders
I worked in high frequency trading for years, and yes I can contest that you will never be faster, smarter, better educated, or focused than professional technology firms trading products.
Ok… so if all these things are technically ‘true’, what’s the point in trying to make money on your own as a retail investor (aka the dumb money)?
Because you don’t have to play the same game as your competition. In fact, a retail trader has advantages over all the genius, well funded traders out there at big funds.
Let’s get into them now, I call them the ‘retail edges’.
Retail Edge 1. You Don’t Have to Trade
Professional traders need to trade. They have to put bread on the table because they answer to fund managers, and customers of the fund. If you aren’t showing 20% + returns at your fund then you will be fired. That means if the market doesn’t seem great, or you don’t have a good idea you better find one or risk losing your job.
The retail trader doesn’t have this problem. They have their own job (most likely), or they’re fully independent and don’t have customers or a boss pushing them for quarterly profit figures.
Here’s an example. Let’s say there was a trade you were certain would make you 100% profit, but you couldn’t execute it for 1.5 years. Meaning you’d have to sit on your hands and do nothing else for that time.
As a retail trader, that would be no problem, go work on that fan-fiction movie script you always wanted to and wait for your winning trade to come in. Then bet it all and reap the rewards.
As a pro, you’d have already lost your job by then (no one is going to pay you a salary to sit around, you need to earn!).
Retail Edge #2 Getting Rich Off Crumbs
The big funds and traders have to manage unfathomable sums of money. Billions and Trillions. That means when they trade, it’s for massive amounts of shares/contracts/dollars.
Because of that, they can only really play in the biggest of markets (the most liquid) to make their bets.
You as a retail trader can exploit trade opportunities that are just too small to be interesting to big competitive traders. If a trade is only big enough to make 1-2k in a small stock, that could be massive for you, but ignored by the professionals as ‘not worth the trouble’.
This is where we live, trading the stuff that the big guys don’t care about (but still is big enough to make us thousands).
Retail Edge #3 You can Be Contrarian
You don’t have a boss to answer to, which means you can have the most unaccepted, wildly controversial opinion on the state of the markets and no one will care.
The hedge fund guys don’t have this luxury. When they make bets and decisions, they always need to justify them to their clients. And if their clients think they’ve lost their minds, they’ll pull their funds.
Watch ‘The Big Short’ (or read it) for an idea of what I’m talking about. In it Dr. Michael Burry makes the biggest (and smartest) bet of all time. But because it was so contrarian, his clients got scared and many sued him to try and pull their money out.
Only Trade With Your Edge
Professionals will only trade things they have a calculable edge on. They know they have an advantage and they bet accordingly.
As retail traders, we can do this too. But our edges are different.
We can wait for the absolute perfect time to make our trades.
We can find small opportunities with high probabilities of winning that the pro’s don’t bother with.
We can ‘bet against’ the crowd all day long without pressure from bosses, or clients.
And this is what the Lazy Contrarian newsletter will be all about. How do we make money as the little guy, without spending all day staring at screens, and without taking massive risks to our portfolios.
Thanks for reading The Lazy Contrarian! Subscribe for free to receive new posts and support my work.