The Evolution of a Stock Market Shark

When I first started trading and investing, I held a set of very traditional beliefs about the stock market. Some of those beliefs were developed in business school at the University of Michigan, and some of them developed from listening to ‘experts’ in the popular media.

The conclusion that I reached was that if I wanted to be a great investor and make a lot of money, then I should approach the market like giant mutual funds and institutions. These pros were often on television talking about how they were buying certain S&P 500 stocks and were holding them for years. Warren Buffett was held in god-like esteem by many who believed it was simple to do what he did. It seemed logical to conclude that to outperform these folks, all I had to do was use the same style but pick better stocks and wait for my genius to be proven.

There were several problems with this thinking. The first was I didn’t have the patience for it. I sat on some big-cap stocks like IBM (IBM) and Coca-Cola (KO) for years and had some gains, but there was no way I was going to produce substantial gains with these boring big caps.

It eventually occurred to me that the experts that champion this approach to the stock market aren’t trying to produce exceptional gains. They are just trying to hold on to client funds and don’t want to take too much risk. The main goal of much of institutional Wall Street is to gather assets. The way that a big fund or money manager makes money isn’t by producing returns but by having billions of funds under management.

I can’t beat these funds at picking S&P 500 names. They have far more money than I and they have a tremendous advantage as far as information and research. Their analysts could pick up the phone and talk to management any time they wanted. How can I compete with that?

It makes no sense for a little guppy like me to compete head-to-head with Wall Street whales. They have done a magnificent job of convincing folks that they hold all the answers to navigating the market, but that is just a marketing tactic. The truth is that they really have no interest in helping me produce a great return.

Rather than try to be a mini-whale, perhaps I should try a totally different tactic. What advantages do I have over institutional Wall Street? The primary advantage is flexibility and speed. I can enter and exit a stock in the blink of an eye. I can trade thin small-caps that move quickly, and I can control my risk by simply moving to the sidelines when conditions are difficult.

Why not focus on enhancing those advantages that I have rather than pretend that I’m going to beat a huge fund by doing exactly what they are doing on a much smaller scale.? The funds don’t even care about great returns. They just want to sell their services to investors.

That is the foundation of what I call ‘Shark Investing.’ Sharks and whales coexist very nicely, but the shark is always in motion. They take big bites, feed in a frenzy, and quickly move on…