Insights From a New Study

New research from Columbia Business School suggests that individual investors might have an edge over Wall Street professionals because they don’t manage other people’s money.

The study found that companies held by patient, long-term shareholders deliver about 6% higher annual returns than those focused on by short-term traders. Institutional fund managers face career-ending pressure to show quarterly results, among other reasons they might be stuck in a “myopia” focused on short-term results, the study argued. This often forces them to abandon volatile or underperforming stocks that later recover.

“Retail investors who are managing their own capital do not have this constraint,” the study’s co-author, Kalash Jain, a Columbia Business School assistant professor, told Investopedia. “Therefore, they should be comfortable investing in companies that may have some risks in the near term, provided they feel the long-term fundamentals of the company are strong.”

What the Study’s Findings Mean For You

Traditional theories about the stock market assume sophisticated institutional investors make markets more efficient by quickly incorporating information into prices. This makes perfect sense—who wouldn’t want a fund manager’s expertise when picking stocks? But this study shows they have a major disadvantage: fund managers’ short-term incentives often cause them to give up on stocks that require more patience than they can afford to have.

Here’s one reason for why: if a fund has even one bad quarter, investors yank their money out. So they might dump anything that looks risky in the short term, even if it’s a great long-term investment. If you’re a retail investor, that’s to your advantage since their loss might your gain—if you know where to look and understand the long-term risks of such investments.

In 2004, the U.S. Securities and Exchange Commission began requiring mutual funds to disclose their holdings four times a year instead of just twice, thinking transparency would help investors. This let the Columbia researchers test if the effect intensified. It did: the mandate made active fund managers more nervous about short-term performance, worsening the problem and creating bigger opportunities for patient investors.

Jain and Jiao tracked thousands of stocks over decades, measuring holding periods. Patient investors beat short-term traders by 5% to 6% annually—a massive difference that compounds over time.

The key is understanding why professionals leave this money on the table. “If they have poor performance for even a short window of time, LPs can pull their capital from the fund,” Jain said, referring to the limited partners who invest in certain funds. “That makes fund managers very aware of near-term volatility or risks, which forces them to have a short time horizon.”

The effect grows right when stocks are looking the scariest. The researchers found the return gap jumps even higher—to over 7% to 8% annually—among volatile stocks or those with recent losses. “Short-horizon investors cannot hold stocks for the long haul,” Jain said. “This should be even more true in stressful pockets of the market.”

Your Edge: No Boss, No Panic

As a retail investor, your biggest advantage might be what you don’t have—someone looking over your shoulder every quarter.

“Retail investors who are managing their own capital do not have this constraint,” Jain said. Fund managers live in constant fear of redemptions—people cashing out. You don’t have clients who will pull their money if you have one bad quarter. When a stock drops 20% in a month, a fund manager might have to sell to avoid getting fired. You can buy more if you believe in the value of the company’s future—indeed, you might think you’re lucky to get it for cheap.

The researchers identified specific situations where patient money has the biggest edge. “We show that the results are strongest among the stocks that have had recent poor performance or high volatility,” Jain said. In other words, you don’t need to time the market—you need to identify which individual stocks the professionals have trouble holding.

How might you find these companies? Here are some suggestions:

• Look for quality companies that have a temporary stumble.
• Pay attention to volatility. If the business case is intact, those swings may actually work in your favor.
• Give yourself time. The study shows that the gains for individual investors is more likely to come from riding out the full recovery cycle.

The Bottom Line

Columbia University research has uncovered data that suggests an important point about investing in today’s market: long-term investors can gain an edge because many professionals can’t afford to be patient. For individual investors, that means the real advantage isn’t secret knowledge or perfect timing—it’s the ability to hold steady through short-term noise and let time and compounding do the heavy lifting.