I’m getting tired of hearing that the stock market’s rigged and individual investors don’t have a chance against the big guys. It’s just not true. Like with anything else, if you put in the time, outperformance isn’t hard to come by.
I’ve met plenty of individual investors over the years that consistently do well in the market. One common trait is that they’re all experts in gauging supply and demand in a chart. Price and volume trends tell them when institutions are buying a stock and when they’re selling a stock. Recognizing when a growth stock is under accumulation in the early stages of a new bull market can be highly profitable.
Many retail investors I know are also top-down investors, meaning they pay close to daily price and volume trends in the major averages. They know when to be in the market and when to be out of the market. A market under accumulation — where higher-volume gains and lower-volume declines are commonplace — is when they put money to work. They average up with their winners and cut bait with holdings that aren’t working. One thing they never do is throw good money after bad. During market downtrends, they move to capital preservation mode, locking in gains in some cases and cutting losses short in other cases. Cash is king when major averages enter a distribution phase.
Successful retail investors also don’t rely on CNBC for stock ideas. Instead, they get them by scanning hundreds of charts each week, understanding which sectors, industry sub-groups and individual stocks are under accumulation and which ones are under distribution. Riding the coattails of institutional investors when they’re buying is usually a profitable endeavor.
Keep in mind that individual investors are much more nimble than institutions. We can quickly move out of a trade if it goes sour. For the big boys, it’s not so easy. It usually takes several weeks to build a position in a stock and several weeks to unwind it. That’s why many institutions are content to sit on a big loss for a long time, hoping the stock comes back. Not surprisingly, this strategy can often result in periods of underperformance.
[Editor’s note: Do individual traders still have an edge? What’s yours? Post a comment below.]
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