The Little Guy Advantage

I had the opportunity to play football in college. As a running back I weighed in at about 195, the average for a fullback at the time.

My roommate also played. Pat was strong but rather short for a defensive nose guard. At well under 200 pounds, he faced off against giant offensive linemen, many well over 3oo pounds.

Amazingly, time and again, he got through to the ball carriers handing them big losses. I asked him one time how he did it. He said, “My small size is my advantage. I sneak right through the seams, and they never see me coming.”

 As a trader, I want every advantage I can get.

Most think of advantages as insider information or a new technical indicator that tells you exactly when to dive in the market and magically when to get out. But the real magic is moving in and out of trades unnoticeable. I call it the little guy advantage.

You see, when you are a small business trader and moving in and out of trades, no one even notices. There is not an unusual option action alert or an SEC fraud investigation. Your trades are masked by millions of other traders trying their best, as well, to remove some cash from the market.

If you haven’t noticed yet, all the big guys must report what they own to everyone in 13F quarterly filings. When they want to make a trade, the whole market moves. If they exit a trade too quickly, their profits also erode as the price retreats rapidly.  

The difficulty mounts as funds grow in these behemoths, and eventually they can, over the long haul, simply match the markets performance. There is no escape from their eventual quagmire.

Take one of the most noted investors of all: Warren Buffet.

“The giant disadvantage we face is size: In the early years, we needed only good ideas, but now we need good big ideas. Unfortunately, the difficulty of finding these grows in direct proportion to our financial success, a problem that increasingly erodes our strengths,” Mr. Buffett wrote in early 1996.

Since 1996, Berkshire Hathaway and Mr. Buffett have beaten the S&P 500 by an average of roughly half a percentage point, annualized. He has warned investors of his lackluster ability to outperform the market going forward. It’s been 25 years since he made the size comment and he continues to be correct. Outperforming the average for such a large conglomerate is rare, especially over time.

In 2020, ARK innovation gained 157% with just a few billion under management. In late 2020 and early 2021, the fund grew tenfold, and in 2021, it returned a – 23%. Eventually its sheer size will lead to its matching the market returns.

Now your objective may be to get to the behemoth size and figure it out from there. We are all in this thing to cash in on some profits. But until that time, we can use our size to our advantage.

By taking moderate profits consistently, our confidence will grow. We can enter and exit trades the big guys can’t get away without causing a market tremor. We can sneak in, ransack the place, and leave quick, without ever being noticed.

Enuf said.