As retail investors, we often perceive ourselves or by others as inferior
investors that are incapable of obtaining superior returns as compared to
institutional investors. This is partly due to the pre-conception that
institutional investors are more sophisticated and knowledgeable where they can
utilise complicated strategies with confusing instruments. However, with more
and more articles that emphasized the ineffectiveness of active institutional
funds and how passive funds are outperforming active funds, you may be swayed
towards believing that active funds are lacking.
So how do we, retail investors who want to take on a more active investment approach, do to outperform the market benchmarks?
Given their long establishment and experiences, active institutional funds do have established processes and frameworks that retail investors can exploit to improve their chances.
1. Efficient employment of capital
Institutional investors often have large amount of capital. To maximise returns, it is also prudent to manage and ensure that a comfortable level of capital is employed for the purpose of earning returns. Evaluation of options to determine returns so as to effectively utilise capital is also important. Depending on choice of asset classes, level of capital usage also varies. From personal experience, in trading forex, 60-70% of capital should be employed consistently to ensure efficient use of capital to generate returns. Comparing to other asset classes like equities, this may be low but given the high leverage nature and buffer for margin calls, this would be sufficient.
Just based on simple logic, by having most of your capital consistently employed and utilised to earn returns ensures a higher chance of out-performance.
2. Recording your investment thesis and reviewing when necessary
Institutional
investors often record their investment thesis when they invest. This is important
for the management and continuity of the investment strategy where new
employees can easily understand and takeover an existing portfolio based on
various reasons for investment. Another important step is to review the
investment only if there are material changes in the investment scenario or
market. Unlike retail investors, they are less likely to be impacted by daily
price movements, which are erratic and random. This could be also possible due
to the bureaucracy layered in an organization where it takes slightly longer
than individuals to evaluate and make decisions. This is then one advantage of
retail investors where we are more nimble and sensitive to capture investment
opportunities. This means that we are able to get in at favourable prices. The
tough part is, hence, to differentiate from the noises of the market (daily
price fluctuations) and sticking to your investment plan.
From personal experience, all
these noises are often the ones that distract me from the ultimate underlying
price that I have for a specific investment. The market will often try hard to
force you to move your positions and fake you out before moving exactly in the
way you predicted. Thus, it is important to be able to differentiate what
change is material enough for a change in investment stance.
3. Having
co-investment officer
We could see
that there are multiple successful funds that have 2 leaders to dictate
investment strategies. Examples are PIMCO, KKR. Contrasting this to traditional
leadership models where one individual will make the overall decision for
direction. From personal experience, by having another investor that
understands the overall investing strategy, it helps to keep one another in
check for emotions such as greed and fear, as well as to promote accountability
in managing other's funds, there are more detailed thought process in both
investors before committing to a decision. Discussions are also conducted to
discuss future strategies and evaluate investment options.
Beside these
techniques, what are the other ways you try to increase your investment
returns? Share it here!
