In this post I will give a short explanation why it can be an advantage to being a small player in the market. As retail investors we are often focusing on the disadvantages of being small investors, but we must not forget that there are also some big advantages. Sometimes we have it easier.
Before we begin however, we have to address the biggest disadvantage people find by being a small player. From my experience the biggest negative of being a smaller player is that you can’t participate in private placement. An institutional or accredited investor has the advantage that they can wait longer than most before they take a position. When a company needs funding they will, through their broker, contact investors and offer a placement on favorable terms for them. Often the institutional investors get a half or full warrant with each share they buy. Many investors are only investing through private placements because this gives them a real advantage. Accredited investors can wait longer than retail investors, and mitigate a lot of risk, while still get a position at a discount. The only time this is not the best strategy is if the sector moves up quickly. The company can then get better terms for their placement with a lower discount because the risk in the company has been reduced.
When we turn to advantages of being a small player I am not comparing to accredited investors, but more against fund managers.
A big advantage by being small and independent is that you can be early. Very few funds dare to take a position near the market bottom. By being one or two years early as a fund manager might be taking on too much career risk. That is why we often see very slow changes of sentiment. You are exposed by taking a position outside the narrative of the general market. Just think of Michael Burry in The Big Short. On the other side, a fund manager has no career risk by being wrong with the crowd. As a small independent investor you can average into a position over time and use weakness to add to your positions.
Another advantage is that you can take a large, meaningful position in companies without moving the share price. A regular fund is so big that it will have problems taking a position in smaller companies. They often have to settle for the biggest players in the sector with lower potential. If a billion dollar fund tries to get a 1 % allocation to a company with a market cap of 100 million dollar they will have to buy 10 % of the company. An ownership percentage of 10 % is way too high for most funds. Smaller investors therefore have the advantage that they can enter the companies with the greater potential to the upside.
Being fast and nimble is also a thing bigger investors can’t be. When they take positions they are more like a supertanker compared to your smaller speedboat. If they want to change direction it takes time. They can’t turn on a dime like us. If they want to enter or exit a position, they have to buy or sell over a very long time in small batches. If not they will move the share price of the company with a big buy or sell order. (Often they will try to sidestep this problem by getting a big institutional buyer or seller instead. This can not be done in a couple of minutes). As a smaller participant you do not have any of these challenges.
There are other advantages by being small, but these are the three most obvious ones I see. If you have any other advantages, I would love it if you shared them with me.