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Your Unfair Advantage Over The Market

Feb. 08, 2019 5:34 AM ETVT, VTI39 Comments
Investment Pancake profile picture
Investment Pancake


  • Retail investors are at an inherent advantage in the market.
  • Working in your favor are the risk/reward imbalance and the law of averages.
  • It takes less energy to take action than it takes discipline to do nothing.

Ahhhh. The ambrosia of sloth and unbridled greed, mixed in equal measure and sprinkled like pixie dust onto your burgeoning personal balance sheet. But just as you curl up before the crackling fireplace with your favorite spreadsheet and a cup of hot chocolate, ready to transport yourself into a blissful fairy tale of above-average returns, you're rousted by a displeasing blast of Arctic air! And then, a cabal of financial service providers barges unceremoniously into the room, waving studies that show how average retail investors tend to lag the performance of the overall stock market. They gleefully tout these sobering findings as incontrovertible proof that individual retail investors are at a structural disadvantage in the marketplace, and therefore require the assistance of paid experts and helpers.

The irony, of course, is that the truth is precisely the opposite. Think about it - the most you can lose on a stock is 100%, but the most you can gain is limitless. This is why shares of stock, which offer limited liability to shareholders, inherently skew the risk/reward equation in favor of the shareholder. Think of it this way. Imagine that you have two upside down cups in front of you, and under each one is a share of stock in one of two different companies. You can't see which share of stock is under which cup, but what you do know is that one stock is very likely going to zero, while the other is equally likely to deliver returns of at least 101%. The imbalance of upside versus downside risk in this game makes it likely that you will win at least 1%.

In the real world, obviously, it is extremely unlikely that you could ever pick only two stocks and know ahead of time that one would soar and one would

This article was written by

Investment Pancake profile picture
Individual value investor with strong penchant for dividend growth.  A former tax and estates attorney who retired in his early 40s and expatriated to Lisbon, Portugal with his family. Now writes about tax law, portfolio strategy and life in sunny Portugal and tutors students in personal financial planning.Association with SA author Evelyn TriasContributor, CNBCProducer of "The Quarterly Compounder" channel on YouTube.com.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This is not investment advice and I am not an investment advisor. Nothing in this article can be relied upon by any person for any reason other than pure entertainment value.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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