They entrust their savings to fund managers, believing that these managers have mystical, esoteric knowledge that will give them the edge to beat the market. What they don't realize is that they already have what it takes to get large returns.
One of my favorite stock anecdotes is from Peter Lynch’s One Up On Wall Street. Lynch tells the story of a husband, too fascinated with some hot stock, who ignores the shopping habits of his wife. If his wife pointed out that she'll be buying from a certain store more often, he pointed out that Wall Street is in love with this new, flashy equity. If she said that the company is opening up new locations, he speculates in the sexy stock and loses money. The moral of this is twofold: listen to your wife, and use what you already know to give you an edge in the stock market.
If you're a doctor who learns about new drugs and secured patents before they hit the market, why would you ever gamble with oil stocks? Pay attention to your industry and profit from it - you'll know key factors long before Wall Street. This applies across the job market, too. If you're working in a shoe store, pay attention to shoe developments and retail trends, so when the opportunity presents itself, you grab it!
This is an advantage that you have over the professionals. Of course, every new company that comes to your town isn't going to be a winner, but if you look at the fundamentals (like debt to equity, a strong niche, etc.) and they all check out, go for it. By the time the pros on Wall Street wise up, you could have captured some big gains. In the anecdote above, the wife could’ve recognized that her new favorite store was geared for fast growth and promptly invested.
Your advantage is knowing your own backyard. Taken literally, it can be applied to real estate investing. You have the opportunity to know your community better than anyone else. When you see a house up for sale well below comparable sale prices, you can act and profit. Remember that you have “acres of diamonds” in your own backyard, as long as you dig for them.
One of the biggest advantages that you have over the big fund managers is something that is often overlooked. It's so simple but investors often don't do it. Remember that half the battle in building wealth is protecting against losses – you have a superpower in this regard, so use it.
You can convert to cash.
Fund managers don't do this! They actively trade and chase returns, even in a correction or bear market. When things start to go south, they mitigate their losses by switching over to blue-chips. Even the blue-chips sink in a bear market. You can avoid this completely by converting to cash and when the market dips, buy all the bargains! Recently, QQQ (a NASDAQ ETF) hit a dip which bottomed on October 16th. If you had a cash position and bought in at that date, you were greatly rewarded with an 8% return in two weeks.
When the talking heads are screaming “sell, sell, sell” and that the stock market is crashing, why not buy? While fund managers are gritting their teeth and bearing the losses (no pun intended), you’ll be comfortably cash, putting you in a much better position to snatch up bargains.
Combine your inherent advantage of knowing your backyard with the ability to sit on cash and you’ll be sure to find diamonds.