The secret weapon to beat the city professionals

published 23 July 2010

As private investors, we have one massive advantage over fund managers. And it's so counter intuitive, you'll probably think it's not an advantage at all; in fact you may think I've lost my marbles.

But here goes: We are allowed to make bad investments.

Let me explain how you can use this fundamental right to your advantage; it's a benefit that just isn't available to most professional investors.

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The City boys are shackled from the start

I worked closely with fund managers for several years and noticed an invisible ball and chain they drag around the office with them. A ball and chain marked 'fear of getting it wrong'.

You see, fund managers have to justify their every investment decision. From the smallest private client account to the biggest pension fund, clients and colleagues question their every move.

The last thing a fund manager will do is make an 'off the wall' investment that could leave him with egg on his face. Yet it's the 'off the wall' investments that can make fortunes.

Only the top fund managers with great track records have the authority to ignore the whispering voices in the corridor. The rest, in my opinion, are 'forced' to make investments that will rarely strike gold. Instead, they do everything they can not to stick out. They wear the same suits, they read the same papers and they make the same conservative investments. And they make the same mediocre returns not that that really bothers them.

Because as long as they're doing what everyone else is doing (and that includes losing money at times) they earn the same megabucks salary as the guy on the next desk. Whereas if they took a risk, failed and did worse than the guy next to him, they'd be fired.

So what's this got to do with us?

You're in a unique position

A bit of humility is all that's required to beat these pros (and I can tell you that isn't an attribute you'll see on a fund manager's CV).

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When you think about it, most investments come down to a fifty/fifty chance of success; after all, for every buyer there's a seller. So if you think it's a good buy, somebody else disagrees.

Ironically, a shrewd investor can set the odds in his favour if he just has the humility to realise his investment might be a bad one. Going into an investment knowing that there's a good chance that you've just put your money on a loser is actually very liberating. And it's how you can get the best deals.

I know this sounds a little weird, but let me show you what I mean.

Double your money when the professionals take you for a fool

As a reader of The Right Side, you know that I'm a cynical old goat. Like most analysts, I'm not keen on the UK retail sector right now. With our sickly economy, it's easy to steer clear of consumer facing businesses.

But to avoid the sector would have been to avoid the best performing IPO in Europe this year.

I recommended readers to take up UK fashion retailer Supergroup's IPO back in March. I went into that deal knowing that it could be a loser...

Just consider how many fund managers avoided the IPO because of its sector. But I didn't have to worry about that. I don't need to justify my decision to anyone but myself. And nor do you!

So what happened to my 'risky tip' on Supergroup?

Profit figures released in their fianl results last week sent the shares flying to over £10. That's double the offer price... so excuse my little gloat, but I want to underline the point...

If a fund manager bought into this IPO and it went wrong, his client would have thought him a moron for investing in the UK retail sector in these inauspicious times. Perhaps many fund managers read the prospectus and saw the great opportunity... but then the weight of his ball and chain proved too much to budge.

Whereas you and I have far more freedom than that and we should take advantage of it.

I'm not condoning 'crazy investments' for the sake of it. I'm saying we shouldn't be overly concerned about facing a loss. Losses are inevitable. But don't expect to hear that sort of talk from a fund manager.

Go read the brochures from any unit trust, or a pack put together by a stockbroker touting for trade. They'll tell you that they've got the best investment team in the world... if they can't beat the market, then no one can.

Yet study after study shows that there are very few funds that beat the market. And now we know why... it's the invisible ball and chain they drag around the office. The fear of a loss, the fear of being branded a fool that keeps them from some of the best investments around.

Make the most of your independence. Don't let fear of a loss stop you from taking the path less trodden.

This article was first published in the free investment email The Right Side

Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.

Managing Editor: Theo Casey. The Right Side is issued by MoneyWeek Ltd. MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798. https://www.fsa.gov.uk/register/home.do

Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.

He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.

Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.