Always goes back to something I learned a long time ago
The difference (meaning) of amature and professional is
A pro gets paid for their services thats it
Study says managers more prone to panic than lone investors
Herd instinct causes dumping of shares
By Mark Hulbert - New York Times
Psychologist call it "projection" - attributing to others the
behavior that we refuse to recognize in ourselves. And the
practice is widespread on Wall Street.
Consider the longstanding concern on Wall Street that naive
inveestors will be quick to dump their stocks during market
corrections, thereby exaggerating declines and increasing
the probability of a crash.
New research by two finance professors, Patrick Dennis
of the University of Virginia and Deon Strickland of Ohio State
University, shows that a far bigger worry is the behavior of - defined
by the Securities and Exchange Commission as those who manage
more than $100 million.
Before the study - called "Who Blinks in Volatile Markets,
Individuals or Institutions?" - the connection between institutional
investors and market volatility was hidden.
Because the SEC requires such investors to report their holdings
only quarterly, it is difficult to know how these large investors
were behaving during short periods of volatility. But the two professors
devised an ingenious solution: They focused instead on the
percentage of each stock's shares owned by institutional investors.
That focus let them test Wall Street's stereotype of the individual
investor as fickle and erratic, vulnerable to whichever way the wind
is blowing. If, in fact, individual investors are more likely than institutional
investors to dump stocks during a correction, then the stocks with the
lowest levels of institutional ownership will fall the most.
But the reality was just the opposite.
The professors studied all the trading days from 1988 to 1996 on which
the stock market dropped more than 2 percent. The stocks that fell the
most were those most owned by institutions. Conversely, the stocks
that fell the least were those with the lowest levels of such ownership.
The results of the study can be found at
gates.comm.virginia.edu
So what leads Wall Street's largest investors into behavior that
they are so ready to criticize in others? The answer lies in the odd incentive
system system under which they operate - they constantly feel obliged to
do things that they believe will reduce their long term performance.
Institutional investors are much more afraid of being alone at the bottom
of the rankings than they are eager to be at the top. After all, a dead-last
finish could well result in firing. Running somewhere in the pack - even if
lagging behind the market - is unlikely to draw much attention.
That, of course, means herdlike behavior, even when it is foolish..
An institutional investor who makes a bad decision needn't worry much
about his reputation if others make that decision, too. So these investors
will sell into market declines, even when they think the stocks they are
selling are undervalued. They reason that the delcline might be the start
of something worse, and although they may think that unlikely, they
cannot afford to be both alone and wrong.
Fortunately, these perverse incentives create opportunities for the rest of us.
How we exploit them depends on our risk tolerance.
If you want to avoid the most volatile stocks, you might seek stocks with
the lowest levels of institutional ownership. (You can learn how much of a
company's stock is owned by institutions through Web sites like Yahoo;s.)
To whittle down the universe, you might first look for companies with less
than 20 percent of their shares in institutional hands; that eliminates about half
of all stocks, according to the professors. To draw an even deeper line in
the sand, focus only on stocks with less than 10 percent institutional
ownership. That knocks out an additional quarter of the market.
If you are an aggresivvve investor, however, you can view institutionally
dominated stocks as trading vehicles. If you are bearish on the overall market,
for example, your list of short sale candodates should include such stocks.
For a stock to be among the quarter of the market that is most dominated by
institutions, according to Dennis, they must own more than around 40 percent
of it.
Wall Street's institutional investors |
