Aswath Damodaran: Individual Investors Have A Huge Advantage Over Portfolio Managers

Johnny HopkinsAswath DamodaranLeave a Comment

In his recent interview with The Motley Fool, Aswath Damodaran explained why individual investors have a huge advantage of portfolio managers. Here’s an excerpt from the interview:

Damodaran:  I think time is your ally, which means as an investor you need a long time horizon. The problem is we all claim to have long time horizons because that’s what we’re expected to say. In fact in my class and now have 400 MBAs. I asked them at the start of the class how many of you have long time horizons? To a person every person in the room claims have a long time horizon.

I wonder how much of that is because that’s what we expect good people to do, sensible people to do. But ultimately your time horizon is not always entirely in your control. If you’re a portfolio manager, your time horizon is only as long-term as your shortest-term client. That’s a reality that actually gives individual investors an advantage over portfolio managers.

My advantage as an investor is I have one client, actually two, me and my spouse. Since I’ve turned off statements and my statements are all paperless she has no idea what we own.

So in a sense I control my time horizon and I can hold as long as I want. In a sense individual investors have an advantage over portfolio managers, and it’s a really big advantage.

It’s something we should be taking advantage of. If you believe something is truly undervalued, you’ve done your homework, you buy the stock. The only pressure you should feel to sell that stock comes from within you. Unless you have liquidity, which of course can shorten your time horizons.

Long answer to your question, time is your ally but for most people who manage other people’s money their time horizons are not under their control, it’s determined by their clients. If you manage your own money, that’s a power you have, take full advantage of it.

You can listen to the entire discussion here:

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