Just as you can with statistics, if you dig hard enough, you can find the numbers to support any case.
But in the stock market, it’s very important to remember that the mindset of institutional investors is different from that of Main Street.
By “institutional investors,” I’m referring to any entity that is buy-side, with investing money being the main concern. The Wall Street investment banker mindset, the sell-side, is its own unique beast.
Institutional investors are paid to play. That’s their business. If a mutual fund or exchange-traded fund (ETF) takes in money, it has to invest it. Contributors don’t pay fees to have money sit in cash.
The stock market is very much a marketplace that is fueled by the supply and demand of common shares and cash.
With greater demand (new inflows to institutional investors) and less supply (the amount of initial public offerings [IPOs], secondary offerings, and corporate share buybacks), prices go up.
That’s why everything in the stock market is only relative—share prices, earnings, earnings estimates, valuations, and views.
Is priceline.com Incorporated (NASDAQ/PCLN) worth $847.33 a share? Or should it be $694.06 a share, like it was on May 1? That’s a huge stock market gain, and the month isn’t even over yet. (See “BlackRock Takes in Billions For Equities: A Signal the Stock Market Is Near a Top?”)
The only thing institutional investors lament is a lack of new cash inflows.
Being in the business of getting paid to play the stock market, the effort is always about participating, not deciding whether to get in or out of the market.
And for institutional investors and funds that buy stocks, new cash inflows create a situation in which the stock market then feeds itself as that money is slowly put to work.
In a secondary market, the supply and demand for common shares is very important.
If you have the desire, consider reading the Form 10-Qs of publicly traded institutional investors and the statistics on new cash inflows to the stock market. It’s a great way to get a sense of the demand part of the equation.
Also consider reading the quarterly and annual outlooks from institutional investors. Most of them offer their general market views for free.
Because institutional investors are the drivers of share prices, it’s useful to know what they’re thinking.
With so much free information available on the stock market today, getting to know the institutional mindset is as valuable as any piece of information available.
A stock like priceline.com appreciated 22% since the beginning of this month for no other reason than the increased buying by big investors.
Getting to know the mindset of institutional investors is helpful in shaping your own outlook and maximizing your returns.
It’s an easy, uncomplicated research method that can pay.