How the Individual Investor Can Outperform the Whales of Wall Street

Many individual investors believe that they are at a great disadvantage in the stock market, because they lack the resources or capital of big institutions. How in the world can the little guy sitting at home with his online broker and social media account possibly keep up with the big investors who talk to company management regularly and have millions, if not billions, to invest?

The answer is that you don't approach the market in the same way. You won't beat Fidelity, Vanguard, or some mega hedge fund by trying to copy them. You don't have the tools they do, and you will never have the information or access to sources they do.

The way you beat the Whales of Wall Street is by using your advantages. What is the biggest advantage of an individual investor? The ability to move quickly and decisively.

Unfortunately, most individual investors either don't appreciate this or don't know how to use their quickness to outperform. You don't have to be a hyperactive trader jumping in and out daily. You just have to be vigilant and have a clear plan for the particular stocks that interest you.

I like to use the shark metaphor as a model for small investors because it embodies an approach that small investors can employ for superior results. Sharks are highly aggressive opportunists who are always moving. They are always looking for their next meal and attack it aggressively when they find it. They don't stick around when there is nothing to benefit them; they swim away and look for the next meal.

Institutional investors are whales. They can't move like sharks. They use their size to gain an advantage and manipulate their environment to serve their purposes. Whales don't have flexibility and move slowly.

The biggest advantage of an individual investor is the ability to move swiftly. Unlike large funds that struggle with liquidity issues when entering or exiting positions, small investors can buy and sell quickly without influencing market prices. This agility allows you to:

Go from all cash to fully invested (and back) rapidly

Exit positions quickly to avoid losses

Re-enter positions if conditions change

These tactics allow the Shark Investor to effectively manage risk and protect precious capital.

Unlike fund managers, who often must stay fully invested, small investors can hold cash during market downturns, waiting for better opportunities and avoiding unnecessary losses. Big funds almost never hold extremely high levels of cash, and they will almost always suffer drawdowns in bad market environments. Small investors can sell everything and go to cash in minutes if conditions are deteriorating.

Shark investors can concentrate on a few high-quality opportunities instead of over-diversifying to meet benchmarks and fulfill portfolio designs. Concentrating capital in potential big winners can lead to significant returns. A small investor can invest a large percentage of capital in just a few of the best ideas, which tends to lead to the best performance.

To capitalize on the benefits of being small and flexible, small investors should:

Abandon the mutual fund model: Don't think like a mini mutual fund with long-term holds and broad diversification.

Be reactive, not anticipatory: You don't need to predict market tops; instead, react to changing conditions.

Stay with trends: Embrace market trends without fear, knowing you can exit quickly if needed.

Protect gains zealously: Be prepared to sell when a position starts to act "toppy."

The drawback of the Shark Investing approach is that it requires more work and constant vigilance. You have to be ready to move fast and decisively when conditions change. It is an active approach, and it can backfire if you are too active or make the wrong moves. But the potential for this approach is tremendous, and it is how full-time investors earn a living from trading.

At the time of publication, DePorre had no position in any security mentioned.