Earlier this month, Barry Ritholtz of Ritholtz Wealth Management suggested in his Washington Post column that amateurs may be able to beat professional investors. Countering Charles Ellis’ suggestion that amateur investors are seriously disadvantaged as amateur football players would be against the pros, Ritholz opines that amateur investors “have enormous advantages of their own.” He says investors “can jiujitsu . . . benchmarks, costs and fees, size, and career risk” that restrict professional investors and, thereby, achieve better results on their own. Each point is highlighted below.
- Benchmarks: Ritholtz notes that comparisons to benchmarks, as well as related marketing considerations, can undermine the pros. “You,” the amateur investor, “can feast on Beta instead of starving on Alpha,” he says.
- Costs/Fees: Ritholtz describes finance industries fees as “an egregious drag on returns,” noting that “you can keep your [costs] cheap, while the pros cannot.”
- Time: “You can have much, much longer-term time horizons” than professional investors, according to Ritholtz. He suggests that “being able to think long term and have patience is a luxury the professionals do not enjoy.”
- Career risk: Ritholtz observes that career-related considerations for investors in most investment firms incentivize them to “manage risk very conservatively.” Partly for that reason, professional investors’ “own interests may not be those of their clients.” While professionals are restricted by the criteria that can influence their careers, amateur investors “get to set [their] own metrics.” He suggests the amateur has “an enormous advantage” in this regard, recommending, “figure out what your long-term financial goals are, then create a plan to achieve your objectives,” measuring success by progress toward the goals.