Investors hear CNBC refer to them all day when they discuss market moves. They say “investors” are doing this and “investors” are doing that. Most people that trade their own account sit in their living rooms, likely scratching their heads, wondering who these “investors” actually are. There are forces in the market, moving people and their funds, and these movements have virtually nothing to do with individual investors. If you search your memory, somewhere in your mind might float the notion that perhaps major financial news networks are giving you a reputation to live up to when they refer to what you “are” doing. They might be planting a clever Carnegie-style seed in your head about what you should be doing.
Learning how to size up a company has to do with, first, finding out what the float is. Float analysis is a critical component to making a smart choice. Long-term, buy-and-hold investors should still be aware of float analysis as you want to know ultimately who owns it and how much do they own. When major news networks talk about investors, most individual investors think they are talking about a bunch of their brethren, sitting at home on their sofas, trading their accounts. Investors, at least by the financial news network standards, almost always refer to institutional investors. The second thing an investor needs to do after looking at the float is to figure out, perhaps with the help of Level II, which institutional investors own the largest chunks and how active they have been in the past 12 months.
Every time a share of stock is sold on Wall Street, online, at the mall, or at the local discount brokerage branch, someone else is buying. That is the very essence of the markets. What you don’t want to do is get into is investing in companies with a near-max float and heavy institutional ownership. You will be road kill over and over again; it is entirely unavoidable in these circumstances. Even if you are a long-term, buy-and-hold who likes to exercise this strategy with stocks for some reason, you don’t want to ignore the percentage of institutional ownership as you might want to, or need to, sell one day. If institutions are moving that position that day as well, you will likely be sold out at the lowest trading price of the day, so it is good to check ownership values, or possibly be the victim of an institutional crush.
You need to move on from institutional ownership to finding out if insiders have moved positions recently, and if they sold or bought. These indicators may mean nothing, but at the same time they can be indicative of trends, so you need to look at that after the institutional ownership picture is complete and compare your findings. For stock analysis, there are several places to go, but you want to find one place you can count on to give you current and concise information for making smart trading moves.
The reasons we invest are numerous, but the bottom line remains the same — it is all about making money, period. What we do in the markets help us to be sure that we have adequate funds available in rainy day funds to help us through tough times. You should never have too much in rainy day funds, however, but just strive to have enough. That said, even long-term, buy-and-hold stalwarts should be taking profit off the table periodically, and one great way to encourage profit removal is to move profits, made on principal, into a rainy day fund. The strategy should always be to capture profits as they avail themselves. There are frequent, major capitulations in the market, so rather than watch profits disappear, it is always a good idea to have a plan to remove profits when they hit a predetermined point.
Focusing on market trends and where the new, hottest company is coming from is tantamount to trying to become an armchair analyst. It is a waste of time. Paying attention to the float, institutional movements, and insider trading is about all an investor needs to know about what to do when investing. In addition, the other factor is to be ruthless about taking profits off the table. This is a recipe for great success and a satisfying investment experience. Watching stocks go up and down is the exercise equivalent of always doing steady-state cardio; it is highly ineffectual. Although this strategy will make investors feel good, as if they did something for themselves, the fact remains that working smarter, not harder, is the key. Working out smarter and investing smarter is a win-win strategy, so out with the steady-state cardio and out with the investing-in-a-company-forever mentality; that is a lazy person’s game.