Many retail investors seem to be labouring under the misapprehension that they can affect the markets. This is a dangerous illusion.
I have been working as a freelance analyst for many years now. And in that time, I have only ever once seen retail investors beat institutions at their own game.
I’m talking of course about the extremely entertaining GameStop short squeeze of January 2021, where a few million Wall Street Bets-infused Redditors took on institutions over-shorting the bricks and mortar business, and for one shining moment, beat them at their own game.
While there was the occasional smattering of overnight millionaire stories, we all know what happened next. The ‘buy’ button was turned off, the share price crashed, and acrimonious finger pointing has been ongoing ever since.
The purpose of this article isn’t to pass judgment on the FINRA or the SEC. It’s to hammer home a point that it appears many investors have forgotten: individually, you have very limited power. In fact, you have no power.
Unless your name is Musk, Buffett — or briefly Keith Gill — you’re riding the wave. Not causing it.
Institutional vs retail investors
This will be bread and butter for many of you, but there are many obvious differences between an institutional investor and a retail investor.
Institutions are titanically powerful market actors: think pension funds, mutual funds, money managers, banks, insurance companies, investment banks, commercial trusts, endowment funds, hedge funds, and private equity. These actors typically account for more than 50% of market volume across western markets, including the US, EU, UK, and Australia.
Retail clients — aka you and me — are individuals who are investing for ourselves. This typically takes two forms; either passively investing into index funds to benefit from the rising boat of the global markets over time (my SIPP strategy), or activity trading individual assets because we think we can beat the market (my ISA strategy).
Power imbalance
There are many factors contributing to the power imbalance between retail and institutions. The most important — in my view — are:
- Financial firepower — institutional investors have much, much larger amounts of capital to invest than retail investors. They can pool resources from multiple investors and make massive investments, such that one institution can directly impact on an asset’s price trajectory. Further, their size means they can negotiate far better fees on investments, and they can invest in specialised assets with high minimum buy-in costs.
- Influence — institutional investors can move the market, affecting multiple prices and triggering reactions from other institutions and retail investors. You may not like it, but when Goldman says jump, we mere mortals may only ask ‘How High?’
- Research — institutions have entire teams of analysts working non-stop to analyse virtually every asset under the sun to generate a profit. Consider this: a Bloomberg terminal costs circa $24k per terminal, and you are unlikely to have access to one. This is a bare requirement for most institutions — who are often three steps ahead of retail at all times.
- Time horizon — this is related to financial firepower but is important to note. Institutions can hold onto paper losses essentially forever, can always buy the dip, and can weather the storm through recessionary periods. Retail client pockets are millimetres-deep by comparison.
- Risk-reward perspective — institutions have much more advanced risk-based options compared to the classic stop losses and take profits of the retail world. They can fully diversify, hedge positions, and again can absorb losses on a huge scale.
- Regulatory protections — cue the laughter from sceptics, but the one area where retail clients have an advantage is regulatory protection. Regulators are aware that there is a huge power imbalance, so the FCA in particular is keen to ensure that you are relatively well looked after. Of course, this doesn’t prevent you making poor investing decisions.
Investing Strategy
Regular readers will know that I have two distinct investing strategies. A decent chunk of my excess income goes into my SIPP and is invested into a small number of index trackers, mostly centred around S&P 500 companies. This passive investing approach is very boring, but offers low risk, stable growth — offsetting the much larger risks I take elsewhere.
This ‘elsewhere’ is small cap investing within my ISA (and outside in good years). While there are many advantages with FTSE AIM investing, including inheritance benefits and the chance of exceptional growth, one defining advantage is that there is a much more level playing field.
Nobody was researching companies like Premier Africa Minerals or Kodal Minerals a few years ago. This has changed in 2023 — but for a good time, I was able to conduct thorough in-depth research, and then buy incredibly undervalued shares.
The institutions just don’t pay serious attention to the smallest companies on AIM, and this means that if you have high risk tolerance, you can get very good prices. My recent notes on MARU, ARCM, TYM, BRES etc prove this — how much serious research is there into these companies?
Further, retail investors as a group have relatively more power overall in the small cap space. If you look at S&P 500, FTSE 100, or ASX 200 companies — almost all of them have share ownership dominated by a handful of powerful market players.
This is not the same for most AIM shares — though of course, to have any influence the group needs to act together which is much harder than it sounds. This will sometimes occur naturally when a bad RNS comes out, in reality we’re all working to our own agenda.
Even on AIM, individual retail investors simply do not wield power. When I buy shares or publish an opinion piece, it has no effect on the share price. Whether you agree or disagree with my sentiment — and remember, it’s only ever an opinion — share prices aren’t going to move.
When Goldman Sachs says lithium might fall further, then every lithium stock in the world dips.
Institutions control the tides. And retail investors don’t cause waves.
We surf them — and hope to catch a profit.
This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.
Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
