Mike's 10 Must Follow Rules for Making Consistent Profits in the Stock Market
Rule #7: Institutional Ownership
Remember... my attitude is to buy stocks that have the propensity to move higher in share price. I look for all the indicators that I can find that will make that propensity greater and greater. One such indicator is Institutional Ownership.
Financial institutions like banks, insurance companies, hedge funds and pension trusts own the vast majority of shares of stocks around the world. As an example, the largest public mutual fund that only owns shares of companies in the Standard & Poor’s 500 Index -- the Vanguard Index Trust 500 Portfolio -- has less than $50 billion in assets. In contrast, the world’s financial institutions are estimated to hold more than $600 billion worth of S&P 500 stocks.
These financial institutions have the best investment research in the world. They regularly visit the management team of companies in which they buy shares. Consequently, they are considered to be the "smart money" that everyone talks about.
When these institutions decide to invest in a company, the move is generally considered very positive regarding the firm’s future prospects.
But... there is a downside to institutional ownership...
When too many of the outstanding shares (the number of shares that have been issued by the company which are held by the insiders and the general investing public) are owned by institutions, there is very little market pressure that can be put on the shares to push the price of the shares higher. I am looking for the propensity for increasing share price. If 98% of all the outstanding shares are owned by a few large institutions, there are very few shares left to trade on the open market... no trading and no change in price.
So, too much ownership by institutions tends to limit the growth of a stock's share price.
But... I also do NOT like to own shares of a company where few, if any, institutional ownership is present. As mentioned above, major institutions are on the look-out for good companies to have in their portfolios. That means if a stock has very little or no institutional ownership, it probably means the institutions have already reviewed the strength and merit of the company and decided to pass. In other words, they have not given the company a good seal of approval. Not having a good seal of approval is almost like having a bad seal of approval... not quite... but almost.
Therefore, I have 3 sub-rules regarding institutional ownership of a company:
- Avoid stocks with less than 5% institutional ownership.
- Avoid stocks with more than 95% institutional ownership.
- Look for stocks with 30% to 60% institutional ownership... I call this my 'Sweet Spot' of institutional ownership.
Continue to Rule #8, Diversification. |
