Most investing books assert that you’re better off taking a diversified slice of the whole market so you don’t need to monitor your portfolio continually. But under a particular set of circumstances, you may be in the box seat of investment opportunities that professional investors aren’t able to see.

Peter Lynch is one of the most successful professional investors of all time. According to him, amateurs can win. The most important rule to follow is that you should stop listening to professionals! The obvious paradox here is that he’s a professional, giving us advice to ignore professionals. But you don’t expect a plastic surgeon to advise you to do your own facelift, a plumber won’t tell you to install your own toilet nor will a hairdresser teach you to cut your own hair. In comparison, investing is a unique industry in which amateurs have some inherent advantages over the pros. If you exploit these, you can outperform the experts.

Advantages Of The Amateur

To understand the advantages over Wall Street, you need to look at the minds of the people in the industry. They all read the same newspapers, listen to the same economists and follow the same trading software signals. They’re quite a homogeneous lot. You won’t see too many ex surfers, uber drivers, high school dropouts or working-class battlers.

Under this current system, a stock isn’t truly attractive until a large number of institutions have recognised its suitability. Or until a sufficient number of Wall Street Analysts have put it on the recommended list. But by the time they have labelled it a ‘buy now!’, the opportunities have passed. It is the rare professional who has the guts to traffic in an unknown stock. The typical fund manager will prefer losing a small amount on an established company, rather than having a shot at making an unusually large profit on an unknown company. Success is one thing, but it’s more important not to look bad when you fail. No fund managers will lose their job, making bad investments into well-known and established companies like Amazon.

But if your relatively unknown company goes bad, they’ll ask: “What’s wrong with you?!”

Fund managers spend a lot of their time talking to clients about the decisions they’re making. First, they need to tell their immediate boss in their department. Secondly, they need to tell their ultimate boss, the clients. And the bigger the client, the more talking the portfolio manager has to do to please him. Some stocks require very little explanation. But others are much more questionable. That’s why security-conscious portfolio managers miss the shot at snagging the ‘ten baggers’ (stocks that go up 10x). Instead, they’ll wait until the analysts pile up on it. By definition, their results are going to be mediocre. But for most expert investors, acceptable mediocrity is far more comfortable than diverse performance.

You don’t have to invest like a big bureaucratic institution. If you choose to invest like one, then you’re doomed to perform like one. If you’re just an average person in the world, you have an edge already. There is no rule prohibiting you. Nobody is calling you out for buying back stock at $19. You’re not forced to own 1400 different stocks.

Common Knowledge

Peter Lynch’s best investments weren’t made in the times where he was doing a complex analysis, slamming away at the computer. His best investments were made living in normal day to day moments:
Taco Bell: He was impressed with a burrito on a trip to California.
La Quinta Motor Inns: He was staying at a rival hotel, and they commented on their competitor.
Volvo: His family and friends drove this car.
Apple Computers: His kids had one at home, and his systems manager bought it for the office.
Dunkin Donuts: He loved the unique style of coffee.

The best investment he made was L’Eggs, which was a consumer product in the 1970s. Whilst Peter was going hard calculating the P/E Ratios and doing quantitative analysis on different companies; his wife found L’eggs in the grocery store. It was just sitting there in a freestanding rack at the checkout counter, that hundreds of people passed every day. His wife knew straight away that it was a superior product. How many of the women who bought pantyhose, store clerks who saw them being purchased, and husbands who learnt of them when their wives returned home with the superior stockings, could have predicted the success of L’eggs? Millions. Just two or three years after it was introduced, thousands of supermarkets had it. Luckily, Peter did some quick research after his wife bought some home, and he saw the fundamentals made sense. Everyone else was too busy buying what was published in finance magazines and websites.

One of the best-performing stocks on the Australian Stock Exchange in 2019 was Afterpay. It went public in 2017, initially at $3 and reached $100. In the first few years, hundreds of thousands of customers jumped on the ‘buy now pay later’ service. They would have seen the utility before the stock was on the radar of the professional investors. If one of those twenty-year-olds bought $200 of stock instead of the $200 pair of Jeans in four equal payments, they’d now be sitting on over $6000.

There are some things you’re sincerely interested in. Whether it is cars or cameras, you develop a sense of what’s good and what’s bad. You know what sells and what doesn’t. In some contexts, you know it before Wall Street knows it. And you have the opportunity to jump on before the investment banks begin to recommend the stock. The analysts only notice the stocks after they’ve jumped from $3 to $30. But you’re able to notice the stock at $3.
As an amateur, you might think it isn’t a sophisticated practice buying the new pair of jeans with the ‘buy now pay later’ system as the initial phase of an investigation into stocks. It isn’t difficult or sexy enough. But this is an edge that professionals simply don’t have.

Industry Knowledge

So far we’ve lumped the executive who has a deep understanding of their product and industry in the same group as the customer in the check-out line. Of course, there is a distinct difference between the two. One has a professional’s understanding of the working of an industry, and the other just thinks it’s a great product. Both approaches are useful but in different ways.
However, in your industry, you’re able to understand the nuances that no investing professional can.

The professionals’ edge is especially helpful in knowing when and when not to buy shares in companies that have been around a while. If you work in the chemical industry, then you’ll be among the first to realise that demand for polyvinyl chloride is going up. You’ll be in a position to know that no new competitors have entered the market, and no new plants are under construction. And you’ll know that it takes two-three years to build one, so there is a unique competitive moat. All this means higher profits for existing companies that make the product.
Or if you own a Goodyear tire store and suddenly after three years of sluggish sales you notice you can’t keep up with new orders. You’ve just received a strong signal that Goodyear may be on the rise. You also know that their high-performance tire is the best.

Think about the website designer who worked on the back end of the ‘One-Click System’ for online shopping with Amazon. There would have been a small army who saw the opportunity and the distinct advantages of online shopping. They knew that the technical problems posed by shopping online would be inevitably solved, Amazon was in the box seat for explosive growth and that there was something special about this Jeff Bezos bloke. There were also thousands of lawyers and accountants, suppliers, brand designers, building contractors and floor cleaners who saw ‘Amazon’ in its early days. Thousands of potential investors could have jumped on this tip. If you bought this stock in 2003, you’d be on to a ‘hundred bagger’. If you bought $30 of stock to go along with your $30 Harry Potter book purchase, it would have turned into $3000.