The Confident Investor

Most of the stock that is traded on the market is bought and sold by large institutional investors. At some point in the future, I will explain those ominous institutional investors and why they exist and where they get their money. If you want get an update when that article is published, you can simply follow me on Twitter at @ConfidentInvest, subscribe to my RSS feed, or subscribe to my weekly aggregation newsletter.

These institutional investors are not immune from the herd mentality of the market. In fact, they often drive it! They tend to be very susceptible to market analysts that put a rating on a particular stock such as Buy, Hold, Sell (or one of the other less obvious ratings). They also tend to give a lot of credence to target market pricing that is published by analysts.

The biggest disadvantage of the large institutional investors is simply their size! Their second disadvantage is their report to their investors. A quick discussion of these two points is relevant:

1. One of the largest investment funds (i.e. mutual fund) is The Growth Fund of America (AGTHX). This fund has approximately 115 BILLION dollars under management!  This is larger than the GDP of a small country like Bangladesh or Morocco! When the fund managers are working with a portfolio this large they have massive investments in any one stock. In fact, according to their 2012 Annual Report their largest holding was $4.8B in Apple [stckqut]AAPL[/stckqut] and now, according to their site, Apple doesn’t make the top ten. When the managers liquidated this stock, they didn’t do it in one order – they had to do it over time. In fact, it is possible that the liquidation of this stock actually drove the stock price down so as they sold more shares, they were selling at lower and lower prices.
2. The second point that is a disadvantage to mutual fund operators is the focus they get on publishing their largest holdings. If you saw a fund that had 5% of its money in Apple over the last 3-4 months wouldn’t you question the manager’s logic? This means that they are constantly under scrutiny on their top investments. A potential investor may disqualify AGTHX if they see Apple at the top of the list. The manager may think that it is time to buy Apple but the risk of the holdings report means that the investment has to be considered wise within the reporting period of the fund.

The advantage to you, an individual investor, is that you can quickly and efficiently buy or sell stock in any company. You can also take advantage of the herd mentality of the entire investment community: you can buy stocks when they have irrationally been beaten down too low, and you can sell them when market exuberance has overpriced a company.

As a small investor, you will not move the market no matter what you do, so you can remain calm and analyze each company to determine the best price to sell and the best price to buy. Your personal moves will not be noticed and start a run on any company. You can quietly and efficiently make your profit.

The key thing to remember is that, when you buy a stock, you may pay too much or you may get an excellent deal. It is only through analysis and research that you can make that determination. It is also essential to remember that most stocks are appropriately priced and will not be a bargain. You will need to be patient to find companies that are bargains. The tools that I describe in my book, The Confident Investor, will help you with that analysis. You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad.