Do you know someone who's said, "IBD investing is simply momentum investing"? Well, you know that person is dead wrong.
How about the officemate who believes that the IBD method is all about marrying the search for fast-growing companies with a preference for stocks boasting high relative strength? Well, yes, but even that explanation is off-target.
If you have a deep desire to find great stocks and achieve superior returns, you must always be cognizant of the third critical aspect of investing — the overwhelming buying and selling power of financial institutions.
Fund sponsorship is what ultimately gives a stock the strength to outstrip its peers and the market itself.
It's the reason why in a good market year — when the major indexes are up 15%, 20% or more — the best stocks are up 200%, 400% or more in the same time frame.
If you're new to investing, you might ask: "OK, just who are these institutional investors?
Practically every adult has heard of mutual funds, which have been around for decades. Today, it's a multitrillion-dollar industry in terms of the assets these investing professionals manage.
But today, they just make up just part of the investing universe. Large insurance companies, public and private pension plans, hedge funds and registered investment advisers also hold the biggest chips on the table. And many of these players join the stock-market game with billions of dollars in client money.
Don't forget the investment divisions of corporations, sovereign wealth funds, ETF companies and university endowments, too. Got the picture
The 2008-09 Lehman-Bear-WaMu-Countrywide debacle certainly damaged the fund management industry. But last June, Pensions & Investments reported that total managed assets of 716 firms surveyed worldwide rebounded to $29.24 trillion in 2010, surpassing the precrisis 2007 peak.
In other words, institutional power is as strong as ever.
Keep that in mind the next time you buy shares. The success of your investment hinges totally on whether smart investment managers are hoarding the same stock.
Over the next week, this new Investor's Corner series will spotlight the unique tools and features in IBD and its affiliated service MarketSmith to help you find the stocks that are becoming institutional favorites.
Remember, most of the biggest market winners need at least a year to rise from buy point to peak. So, the data found in tables of the Mutual Fund section might seem dated, but it is still useful because a mutual fund takes months or even a few quarters to build a large position in a single stock.
When you see strong volume in a market leader's chart and you know that outstanding funds have been buying funds, your conviction in that stock will likely solidify.
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