The Globe and Mail, Report on Business
Published November 29, 2008

I've been getting more "hate" mail lately. The e-mails from readers who disagree with me have become more pointed; I need oven mitts to handle some of them. It could be that I'm missing the mark more often, but I like to think it's more a reflection of the times that are - and the returns that aren't.

In many cases, the comments are a diatribe on the wealth management industry in general: its fees, complexity and lack of added value relative to the expectations that have been set (exotic travel, children at Harvard, your own vineyard). And it's interesting that, in more than a few instances, the writer's conclusion has been to fire their advisers and managers and go it alone.

Now, while I'm part of this currently unpopular profession, I am no portfolio management snob. I happen to think that some individual investors do a good job managing their own portfolio. But let me be clear. Those "some" make up a tiny portion of the population. There are very few people that have the time, interest, knowledge and psychological makeup to do it themselves. Most need to focus their efforts on being better consumers of investment services, not better stock pickers.

Having said that, I think the armchair investor who does have the time and interest is competing on a more level playing field versus the pros than at any time I can remember. It's a much fairer fight.

Obviously, the professionals have some important advantages. For starters, investing is their day job, so they have the requisite time, training and experience. With that comes a better flow of research information, including access to company managements and industry experts. They also have the tail wind that results from paying lower trading commissions - just pennies a share.

But the pro's edge is not what it used to be. With changes to company disclosure requirements and online access to conference calls and management presentations, the information gap has narrowed. As for trading, the commission discounts enjoyed by professional managers are often offset by the market impact of their large orders. For example, they have to pay up to buy a block of stock, or take a bigger haircut on a sale. A patient buyer of 5,000 shares through a discount broker will often have a lower cost of acquisition (commission plus market impact) than a buyer of 500,000 shares.

While the professional's edge has narrowed, the individual's advantages are as valuable as ever. If small investors don't trade too much, they should be able to lower their costs by not paying management fees or absorbing marketing costs. Another big advantage is that smaller investors don't have liquidity constraints, so they can buy any size or type of stock. As a result, they can make a small company a large part of their portfolio, something the mega-managers in a consolidating industry cannot do.

Although it's a sad commentary, the fact is that individuals whose retirement horizon is years away can take a longer view than most portfolio managers. They can take advantage of the market's biggest structural inefficiency, namely "short-termism," because they aren't bound by the quarterly reporting cycle, fund constraints and/or career considerations.

Individuals are not beholden to an index or benchmark as many professionals are. If they feel uncomfortable not knowing what's on a bank's balance sheet, they don't have to own it. Exposure to energy and resources can amount to 10 to 15 per cent of their portfolio, not 40-50 per cent. And they can collect the income from their corporate bonds, preferred shares and high dividend stocks, and ignore the short-term market gyrations.

In addition to those realities, there are a number of factors that make me think the field has levelled even more in the current environment.

Individuals aren't dependent on their bank or broker for credit, unlike hedge fund and private equity investors. Without a management fee of 2 per cent plus a 20-per-cent performance bonus to pay, they don't need to lever up their investments to make the numbers work.

They don't have redemptions to deal with, so they aren't forced to sell a stock on someone else's schedule. Indeed, individuals can take advantage of the current environment where forced or distressed selling is a regular occurrence. While others are experiencing margin calls and client losses, an opportunistic buyer can find some real bargains.

Having stated the case for the amateur investor, I don't want to play down the skill factor or imply that success is guaranteed. Far from it. In this market, many individuals have had their head handed to them, as it's been a minefield for the types of stocks they like to own: banks, insurers, income trusts and, for the more adventurous, small-capitalization resource companies.

Still, I think this market will be a wakeup call for many Canadian investors, and that their first move (after sending me or someone else in the industry an angry e-mail) should be a careful assessment of the alternatives, which range from complete delegation to "do it yourself." I would like to see more investors move into the "do it yourself" camp, but I'll settle for just moving into the middle of the curve - being a good consumer of investment services.