Despite the often-touted fact that many fund managers underperform the market, it can be quite hard to beat a fund manager over any given timescale.
Short periods of time are somewhat dictated by luck, plus fund managers spend all day long looking at shares and they get to meet management of businesses. If you don't also spend all day long looking at shares then you are a distinct information disadvantage.
But, Lawrence Lam from Lumenary Investment Management wrote three suggestions for Livewire as to how to beat the fundies:
Ignore the noise and seek out the true source of information
Don't fall for reading opinions as though they're facts. It's better to research a business yourself by digging into what it does, how it makes its money, who its competitors are and so on.
You can read the company's annual report just like any other investor. You can also look at reviews of it from customers, staff and other stakeholders to see if the directly-associated people think highly of the business or not. If they don't, this can be a warning sign.
Fish in under-fished ponds
Many fund managers are risk-averse, they try not to lose capital. This can result in funds always trying to perform decently over the next year but missing out on long-term gains.
Small caps are too small for many funds. To make that small cap a reasonable size of the portfolio they would have to own a significant portion of the business.
The small end of the market is not often looked at by fund managers, research analysts and regular investors. This is where you may find many find hidden gems.
My colleagues and I try to cover a broad number of shares, both large and small here at The Motley Fool for you to do further research on.
Focus on quality, not quantity
If you're not investing in a low-cost index fund then there's no point creating a portfolio of an excessive amount of positions. It's up to you to decide what the right number is – perhaps it's 10, 20 or 30. Anything more than 40 would be too much in my opinion. Is the 40th idea really as useful as the 10th best idea being in your portfolio?
It's better to know your shares intimately and believe in their long-term potential than barely know anything about a large basket of shares.
Foolish takeaway
Each investor must find their investing style that works for them, but I'm very happy having a portfolio with smaller shares like Duxton Water Ltd (ASX: D2O), Paragon Care Ltd (ASX: PGC) and Propel Funeral Partners Ltd (ASX: PFP) for long-term growth.
