How to Beat the Markets: Tracking the Elephant Herd Through Institutional Ownership
by Dr. Scott Brown, Education Director, Investment U
Friday, May 22, 2009: Issue #1003
Students often ask me “Is there a way to consistently trounce the S&P 500?”
And there are lots of people, investors, academics, and professionals alike, who will tell you – and truly believe – it can’t be done. So can you really beat the markets?
As a finance professor I’m here to give you an unequivocal… Yes!
It can be done…
Academics Say The Markets Can’t Be Beat
You see, academics in the financial world have won Nobel prizes for research saying that the markets are so mathematically precise in their efficiency they can’t be beat.
- This gave rise to the simply wacky Modern Portfolio Theory with its beta coefficient or “beta” as a yardstick of individual stock performance against the S&P 500.
- Then a flood of academic papers rolled in which clearly documented high-yield market-beating “anomalies.”
- These ranged from newly issued stocks to international equities – both had inexplicably high returns from an efficiency perspective.
- Cutting edge finance researchers realized that a whole new market paradigm was needed where beta is not fully linked to the market proxy but to individual investor behavior.
We can do even better…
Because it may come as quite a shock, but human behavior is not mathematically precise. (Ok, that shouldn’t really shock anyone.) Our collective market actions are often based on fuzzy thinking, emotion and psychological quirks.
Because of this, some stocks are simply set up to outperform the market – often radically so. If you know what to look for, that is. And I’m going to show you how. Here’s a quick glimpse of how to spot diamonds in the rough and how to measure the expert’s opinions on it.
The Biggest Market Movers – Methodically Track the Herds
Unfortunately, little-guy stock investors like you and me don’t move the market much. Seismic, market-changing movements come from the big money managers on Wall Street.
Their buying and selling is funded by millions of employees pumping trillions of dollars through their retirement funds – like 401(K)’s and IRAs you yourself may have.
- These fund managers roam Wall Street like steamrollers. Much as elephant herds roam the African savannah – everything gets out of the way of both.
- If one of these funds pumps money into a stock, the flow can be measured in the hundreds of millions of dollars – often over a few weeks. This elephantine buying of a large mutual fund drives up the value of the stock quickly.
- As the herd mentality of Wall Street takes over, others follow. Elephants move in groups – and where you find one, you’ll find many others.
So how can you tell if a monster fund is injecting capital – with a gargantuan hose – into a stock you’re watching? Simple. There’s an extraordinarily easy way to tell of your stock is being acquired. It’s called Institutional Ownership.
Beating The Markets With Institutional Ownership
Insititutional Ownership is as easy to track as using your Internet browser is. There are a number of sites you can find this out. But one I find most helpful is http://finance.yahoo.com/.
- Type the stock symbol of the company into the “get quotes” form on the upper left part of the webpage.
- When the page for the company information comes up, click on the “Key Statistics” link.
- Then on the same page in the “Share Statistics” section you’ll see the value for “% Held by Institutions.” This tells you how much of the company the big funds own.
For instance if I enter “F” for Ford, I see that today’s institutional ownership is 44.6% of the company shares.
I teach my MBA students that in financial analysis we really don’t care as much about the specific level of a number “snapshot,” but more importantly how the value changes over time.
Print off, or record and save the Yahoo Finance web page for “Key Statistics” each week and you’ll see for yourself how institutional ownership is changing. If fund ownership is going up you should consider buying the stock. If institutional ownership is going down you shouldn’t necessarily sell but you might consider tightening your trailing stops.
Watching these elephants start to pile into a stock is one of the surest ways to know you’ve got a diamond on your hands. It’s simple, it’s easy, and it’s incredibly profitable.
Here at Investment U, we have a whole new way of thinking about the markets that revolves around market beating “anomalies” like this.
After thoroughly researching more than 100 years of stock market history, I can tell you that the market can be beaten, and that there are more ways to do it than you can imagine.
It all starts with education,
Dr. Scott Brown
Related Investment U Articles:
- Understanding the Beta Coefficient
- Do Trailing Stops Really Work?
- Do Trailing Stops Really Work?
- The Five-Step Market-Beating Formula for Successful Investing
- Follow The Wall Street Pros if You Want to Lose Money
8 Responses to “How to Beat the Markets: Tracking the Elephant Herd Through Institutional Ownership”
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Dr. Brown specializes in teaching stock investing because as he emphasizes "the stock market is where individuals and families have the best shot at succeeding financially!"
An excellent and informative article. I am a retired Professor of Finance and I appreciate the fact that Dr. Brown has an eye on the academic research world as well as the practical world—and is able to reconcile the two to our advantage.
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Thank you for articles such as institutional holdings. I think the more you teach investors they better they will appreciate your services.
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Thanks for the article. Dr. Brown wrote:
“I teach my MBA students that in financial analysis we really don’t care as much about the specific level of a number “snapshot,” but more importantly how the value changes over time.”
I understand – but by the same token I was wondering, is there a starting point or some level under which it’s not interesting (yet) to buy?
In other words; Allied Irish Banks is at 2.50%. It might go to 3.00% next week and 3.25% the week after but surely 3.25% also says something, doesn’t it?
I’m somewhat new to this so my apologies if my question seems naive.
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so the mkt is crazy
we are two srs our money is in cd s and you know the meager returns that is producing
so we have thought about corp bonds hi rated with fair dividends
so if we want conv bonds or conv preferred stock where do we start looking ad quantrum is not understandable to us
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I like the analogy of the elephant safari. and I have a question does yahoo finance updated monthly or quaterly the institutional ownership?
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Dr. Brown,
Thank you very much for a very concise and clear instructional guide on Institional Ownership. I will add this very useful tool to my other yahoo.com research which I already use daily.
Excellent advise! Thank you.
Kim Creed
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It is a very clear and presents the aspects that some investors sometimes do not pay attention.The tools Dr.Brown gives us is an excellent methodology to track and decide where and when to trade.
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Nice primer. I forwarded it to my son in college. Maybe he will soon be interested in something other than girls and his I-pod. OK, maybe not…..
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