07 January 2012

What Is the Most Important for Small Investor in 2012?

I’m currently running a simple poll in a LinkedIn networking group for small investors, analysts and investment professionals. As a small investor and a hobby-analyst by myself, my question is: “What would you consider as the most important for a small investor in 2012?”

I’m asking this because there are just so many investment strategies and instruments available for us that it’s easy indeed to get confused. Add to this the challenging macroeconomic environment, difficult-to-predict policy responses, apparent panic and confusion in the markets. Forget that you are able to analyse or even monitor everything by yourself (I once believed that I can do this, but it quickly proved to be false); thus, as an individual investor you need to focus on something. But what’s the most important? What’s the most important in 2012?

I’m also asking this, because I’m disturbed by the numerous brokerage platforms urging people to trade far too frequently and with the instruments that they really don’t understand. (Remember that the revenues of such brokerage platforms directly depend on how much you trade.) This particular issue is enforced by the “actionable” analyses giving you frequent buy-sell suggestions.

The poll has the following choices:  
a) find out sound companies to invest in
b) understand financial & economic news
c) continue looking for "safe havens"
d) find a good advisor
e) something else (what?)

The number of answers is not yet representative for drawing meaningful conclusions, but together with the discussions that followed, it provides some valuable insights and thought-provoking questions to ask.

Choices (a) and (b) appeared to be more-less equally important, i.e. as some of the respondents (professionals in the area, btw) put it: “Have your “shopping list” of great companies ready, and just wait for the macro to cause a sell-off and then snap them up at a bargain.” Sounds simple, doesn’t it? More importantly, it makes sense to common sense. And, as worded by another respondent: “Having "common sense" is the key to successful investing. Common sense is the most advanced form of qualitative predictive modelling.”

I asked why no one had pointed out the technical analysis skills as (possibly) something important to have for a small investor. After all, in times of high price volatility, at least in theory swing trading could prove to be more beneficial than the so-called “buy, hold and pray” strategy. (I’m not a big fan of any sort of trading by myself, but for the sake of greater objectivity I had to ask this question anyway.)

As a response, I was directed to read this article: “Is Technical Analysis a Waste of Time?” Well, basically the article implies that yes, it is. The conclusion was drawn based on a study by the finance professors at Massey University in New Zealand who examined more than 5,000 technical trading rules to see if they added value, and found “no evidence that the profits to the technical trading rules we consider are greater than those that might be expected due to random data variation."

Another now retired fund manager added that this is an old discussion about the technical analysis; he had read a study already back in 1980s which said, that there was at least one chartist that got it right and seemed to do well but the rest were wasting their time (and money, I guess). The way this fund manager had made profits for his clients “without a break for over two decades” was “by extremely hard work, lots of chats to experts, watching exactly what the market was responding to, and adopting the philosophy that there is nothing wrong with cash whilst you wait for the right buying opportunity.”

My question led to the discussion about the volatility. An equity strategist commented: I would say that the danger of volatility is that it often forces you to take the wrong decision at the wrong time. [...] Timing remains as important as ever and still makes everything. [...] Nerves, discipline, experience and a healthy way of living are on your side. Oh, and additionally, cash helps...  The other suggestion was that: Volatility = Uncertainty = Risk = Terrible headlines = Fear = Lower stock price = Great buying opportunities, if you know what you are doing.”

“You have to know what you are doing.” Precisely, but since this requires hard work, and takes a lot of time and effort (basically, all of your time), actually the option (d), “find a good advisor” was the most suggested one based on the number of votes (40% of the votes so far). However, the result was questioned by a capital markets professional in the comment section: “I am curious, what shall a small investor do with a good advisor. What do we expect from a good advisor? Ever met a good one?” A former financial advisor replied to this: As an ex financial adviser myself I can tell you that this is a dice game. Regulations are getting tougher all the time which helps, BUT the text books they are following are not all that good.

As I’m writing, the crucial issue of who actually is a good financial advisor has remained unanswered. I suspect, because no one really has an answer. And you still have to pay for the services of a financial advisor, no matter if good or bad.

To conclude, I believe that the best thing what a small investor can do in 2012 (and onwards), is to take advantage from the collective wisdom of many (independent) analysts and other professionals, and make his/her informed decisions based on the inputs such as:
* professional suggestions of great companies,
* thorough analyses of these great companies,
* and expert comments of how to interpret the latest financial & economic news, and what impact they might have (helping to decide if now is the time for entering the market).

Is it actually doable? I mean, can a small investor access this kind of collective wisdom without spending much time and/or money, while still having all reasons to believe into the quality of the analytical basis of his/her decisions? I think so. It’s a part of the future of finance: the true financial and economic expertise will become cheaper, and the true professionals will be sorted out from the so-called experts. A new unique solution for small investors and professionals is under development right now. Just ask, and I will keep you informed: info@logicoffinance.com

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