Thinking small.

I’m just churning some thoughts through my tired brain right now (after a long weekend of work, economics assignments and some intense cybergaming) while watching a documentary on the stock market crash of 1929 (after reading a long article on Black Monday, a crash almost 50 years later in 1987). Some of you might have read from best-selling books that retail investors – I think a fancy name for simply the rest of us – have an edge over the institutions and big giants like banks and all that. The authors – and I’m making a broad generalization so please indulge me for a moment – claim that we’re different and paint a picture of us being ’swift and nifty’, darting in and out like a speeding bullet while the big boys move like incumbent snails.

The phenomenon of investing and trading have no doubt caught up like fire in the late years, and is projected to grow to be one of the key ideas of wealth accumulation and growth among many. In recent years, one can easily find many young students in university tracking their mini portfolio among break time or placing orders over their smart phones in between lectures. It’s quite a sign of the times. The most common vehicle would no doubt be stocks. A stock – a share of a company – bought and sold by many in the markets – Asia, US, Europe – take your pick… most brokerages come with access to a wide variety of markets today.

Ok, so where am I going? I, no doubt under a cloud of caution and pessimism after the documentary, am thinking that small is not big. Small has its advantages no doubt, but I think the idea of retail investors/traders being able to outwit the big boys is somewhat akin to a romanticized picture of the underdogs outrunning the big stars. Sure, we applaud that in the movies but in real life, that isn’t quite the case in most scenarios. The markets are not a place designed to accomodate underdogs but one designed to slew the most of them. Stop and think about it. Brokerages, investment firms, financial products salesmen, trading seminars pushing recurring fees and software that are more expensive than the average Joe’s starting capital, the big boys pushing out advertisements in investment magazines and financial newsletters… Where did they get the funding from?

I opened an account recently with a local market maker that allowed me to trade CFDs and FX contracts (I deposited a small amount for the sole purpose of trading the HSI using CFD). They promoted themselves as offering ‘real’ education to their clients, so their clients can all succeed. To make this statement sweet, I was encouraged to attend their courses and they even sent me a couple of CDs. But going through the material, you’ll find nothing with an edge. You’ll know basic market history, how to place orders, how to operate the software… that’s it. Nothing on trading psychology, going beyond simpel technical analysis and so forth, position sizing and the appropriate style and advice given the client’s profile.

In an interview on a certain magazine, the owner of the firm was asked if he felt issues like trading psychology were important – his answer: Yes, in fact much more than things like technical indicators and so forth. But when asked if he would introduce these courses for his clients, he said ‘we have no plans at the moment’. Gosh… what happened to the ‘we care for you all and we’re here to make sure you succeed’ talk?

Well simple, retail investors is a concept, a fancy word. Think retail consumers. We buy clothes, iPods, makeup, gadgets… and make the store owners rich. And stocks and other financial instruments now do the same – making most of us underdogs poor. I read from the article after the 1987 crash most of the top heads of big funds and brokerages are still in the business, many of them in new positions in new firms. They’re still there. Most of the underdogs however, aren’t. Of course, I don’t buy into the extreme view that we’re all going to commit suicide when we get hung and dry. But the possibility is very real.

And thinking small isn’t a bad first step if you consider yourself of the small timer variety. Just don’t join the weirdos down that virtual lane and diss the big boys. No sir, fight them everyday, and if you win, be glad you did. But do not let your guard down… last I heard, they’re still on the constant lookout for fresh meat. Before 1929, after 1987, and certainly with ever more ferocity in 2008 and beyond. Don’t say I didn’t warn you.