Investing In Shares, Theories For A Small Investor.

Ok I am in the middle of what appears to be a little series on buying shares. It should be noted I am talking at a fairly wishy washy level and don't have that much experience in this area just yet. Blogs are most interesting to write when the ideas that are new in your head and you are still figuring them out. It is the reason you probably wont we me talking about calculus as I learnt that a long time ago and hence have no urge to write about it.

In a previous post I outlined why I would not do day trading the main reason being I am at a disadvantage to the professional. I really want the situation reversed, I want the advantage or at very least have even odds.

So what is the one big advantage I have over professional traders. I have time. Most traders have a limited time horizon. Day traders things in minutes, other professional traders think in terms of months, very few think in terms of years. After most will not be at the same company in a couple of years and they have monthly and quarterly target to hit. Time is a weapon I can use against them.

Another advantage is size. I am tiny and my purchasing power is so small it is like a sparrow trying to change the orbit of earth. I don't effect the market when I buy shares. The professional often have large sums to invest. If they invest in a small company their purchases will put the price up as they buy into the company and push the price down as they move out of the company. Effectively the buy high and sell low, the opposite to what you want to do, hence they don't do it. This means I have a wider range of companies to invest in.

As far as I can see these are the two main advantages. So how to be wield them. Lets consider time.

With time I can by shares that have fallen out of favour with the market. Different sectors become hot favourites and it seems to be cyclic. So if a sector is depressed a bit I can purchase into those sectors. Carefully selecting the companies I buy of course.

Time also means I can hold shares for longer and reduce my transaction cost. Dividend paying share let me use the power of compounded payments to grow my holdings. I think in the uk reinvesting dividends is cheaper than buying new share in the company in terms of transaction costs. So time lets me avoid some of the dealing costs of buying shares.

The size advantage is as I alluded to above. I can cast my net wider to find great companies to invest in. If the company only has a market cap of 50 million not a problem as long as it looks like a good investment I can roll with it.

So in summary my theory for investing is find where I have the advantage or at least where the odds are not against me.