Let’s be real. Retail investors like myself that buy FTSE shares in an ISA don’t have too many advantages in the stock market. I don’t have powerful trading software that flashes Buy and Sell signals. I don’t have an army of researchers or a Bloomberg Terminal.
Billionaire hedge fund managers and other institutional investors do enjoy such privileges. They can even get in before a company goes public, buying shares at a lower price. They attend private events, like Davos or Sun Valley, where they can rub shoulders with executives.
Indeed, some have the power to move markets. The latest Warren Buffett buy normally gets an instant uplift as soon as the market finds out. In contrast, my occasional £1,000 here and £600 there doesn’t move anything except my own bank balance.
So what advantages do we everyday investors have, if any? I think there is one. And fortunately it’s arguably the most powerful one of all.
Time
The key advantage — and probably the only one — that retail investors have over the market is patience. In other words, time.
Unlike hedge funds and analysts who tend to be focused on the short term (i.e., the next quarter), I have a multi-year investing horizon. So I don’t have to worry about short-term losses and can hold through downturns.
If someone invests £1,000 a month and achieves a market-beating 12% average return, they would have £1m after 21 years. That return isn’t guaranteed, but it’s far from unachievable. And while a million pounds might be chump change to a billionaire fund manager, it would make a big difference to most everyday investors.
At a basic level then, compounding rewards patience. The longer I stay invested, the bigger the potential returns.
In contrast, large asset managers face pressure to outperform benchmarks. But I don’t need to report to anyone, so I can afford to keep holding through downturns without fear of looking daft.
Foolish investing
Because I’m a long-term investor, I want to invest in companies that are run by management teams that are similarly long-term-focused.
This is why I hold shares of Scottish Mortgage Investment Trust (LSE: SMT). The FTSE 100 trust invests in what it considers to be the world’s greatest growth companies. Then it holds these stocks, ideally for at least five years, but sometimes much longer.
In fact, Scottish Mortgage has over 40 investments that it has held for more than five years. Not all have been winners, of course. But some like SpaceX, Nvidia (up 1,700%), Spotify (up 330%), Tesla (550%), and Ferrari (195%) have done tremendously well.
Over the past 10 years, the trust’s share price is up more than 300%. That’s obviously a very solid return.
Naturally, there is no guarantee that the next decade will be as fruitful. The managers have identified areas which they think are ripe for explosive growth — artificial intelligence (AI), the space economy, and AI-powered healthcare — but these might not progress as expected.
Also, the shares can be extremely volatile. Or as manager Tom Slater puts it: “The returns we aim to produce for shareholders will appeal to many, but the road travelled in achieving them may not.”
As mentioned though, I’m willing to hold through downturns and volatility. Patience is the real advantage I have.
