In fact, the little guys will always outperform the professionals, so long as they don't try to compete
To many, the prosecution of hedge fund chief Raj Rajaratnam was final evidence that the glory days of the small individual investor had passed. We already knew that amateur investors lacked the resources to match the research efforts of sophisticated institutions and hedge funds. The rise of automated trading systems that continually scan the markets and trade in time frames approaching microseconds introduced another dimension to the market that was well beyond the reach of individual investors. Then, we learned that well-connected hedge fund managers were paying for market information in surreptitious deals of which individual investors knew nothing at the time.
It is not surprising that many individual investors, and many pundits as well, concluded that the best course of action was to put one's money with a sophisticated hedge fund or go home. Amateurs could no longer possibly compete effectively in the modern marketplace.
Such views, though intuitively appealing, turn out to be completely wrong. In fact, if individual investors accept their limitations and act wisely, they will always outperform active professional investors on average! Furthermore, this surprising conclusion does not depend on complex economic arguments involving market efficiency or rationality: it is a direct result of basic arithmetic. A simple example illustrates why amateur investors should not despair.