Does Size Matter (in Investing)? Part 1

By July 10, 2018 January 2nd, 2019 No Comments

About a month ago, I was speaking on financial education with Kevin O’Leary from Shark Tank in my old stomping ground of Long Island — I grew up on the eastern part of it — when I was confronted by some angry people who weren’t able to get into the event. Mind you, this is a free event and we simply did not book a large enough venue.  The angriest person was a 30-something, who works at a big Wall Street firm. He made a comment that I hear often, and it is one of the biggest Wall Street myths and fallacies out there: ”I work for ……. and we have hundreds of billions under management, you manage what? Ha, that’s nothing.”

This bothered me years ago, but as I gained more financial knowledge, I realized how this statement was wrong on so many levels — and how people like this gentlemen are just so misled and misinformed. First, just because a firm, hedge fund, or mutual fund has a lot of money under management does not automatically make it a great money-making firm or the best place to put your money. 

When it comes down to just plain old making money in the markets — and I hate to break this news to anyone who didn’t know this already — being too big hurts your returns. 

It has been tested and proven; just ask Ray Dalio or Warren Buffet. For a firm like Ray Dalio’s to make a 50% return in a year with the size that they have under management, they would have to be way too concentrated. This means that they would be taking on too much risk. One of the advantages for anybody who is investing $1,000 to $50 million is the ability to have outsized returns without taking unnecessary risk — and to wait for the best opportunities to arise and be nimble enough to make changes very quickly in one’s portfolio. 

Warren Buffet once said that if he only had a few million dollars to invest he would be able to return 50% a year; because bigger isn’t better when it comes to investing in the market. Think about it logically. If you get too concentrated in one position to try to make the big returns, you are at risk of having huge drawdowns — and then there is the issue of liquidity in the security or asset you are trying to invest in. There are only a certain amount of stocks or asset classes that have the liquidity that can handle direct investments from a firm like Bridgewater before Bridgewater is trading/investing against itself. Another reason bigger isn’t better is that most mutual funds and very large funds diversify themselves out of making decent returns because of the very reasons I talked about above. They do not want to have concentrated positions and too much risk in one or a few positions. In return, you eliminate some risk, but you also eliminate good returns.

Another reason why bigger is not better in investing (and I like to say this about investment strategies, but it also applies to financial firms) is that not all big firms are right for you. Each individual has different needs and wants. Some investors might need what big firms have to offer, but most of us really don’t. Most individual investors/retail investors need just need to educate themselves on how to take control of their finances, and find someone that will take the time to make that journey with them instead of dictating on how they should invest their money — and most of the time they will not find that at a bigger firm.

Just remember: Bigger is not always better when taking control of your financial life.