It took me two years to find my investing ground.
I was obsessed with the idea of turning my $10,000 into $100,000. But turning it into $5,000 was much easier (and frustrating). I was doing what everyone else was doing on SeekingAlpha and Twitter.
You can call yourself a failure if you didn’t learn your lesson. Luckily, I did learn mine.
I stopped using an outdated analysis and learned what it takes to be a good investor in the 2020s.
Be honest with yourself
You must be clear about what gives you an edge in investing.
Otherwise, stocks aren’t for you. Go with an index fund. It’s a fully legit but boring way to get wealthy.
This is what an edge looks like:
It’d be cool to know a few days before that a public company is about to sign a big contract. But it’s illegal.
So you turn to ratios.
“The price-to-earnings ratio must be 20 and the price-to-book ratio must be below 1,5 for a stock to be a bargain.”
If it were so simple…
Everyone can compute ratios (you have no edge).
Ratios were first mentioned in the 1949 book The Intelligent Investor by Benjamin Graham. You won’t believe me if I say the 2024 stock market is the same as the 1949 stock market.
Ratios are different for different industries and even different stocks in the same industry.
Ratios tell you nothing about stock cycles. You can apply ratios, buy into a downtrend, lose 50% of your capital, and wait for the next five years to get your money back.
A myriad of factors affect stock prices - interest rates, publicity, geopolitical situations, energy prices, Elon’s statements… Ratios are but one (outdated) metric.
You can use ratios for a very general assessment of the economy. Compute the P/E ratio of the S&P 500 to see if the economy is overheated. Take a look at the soaring P/E ratio of the Technology Sector in relation to the falling P/E ratio of the Healthcare Sector.
It’s hard to be more exact than that. You need something else to buy before other investors and enjoy profits.
Who you should invest with
I’m talking about stock charts.
You may say they’re also available to everyone, just like ratios. The point is what you see on the charts that others probably don’t see.
It’s technical analysis. Here’s why it’s important.
The main participant group in the market is institutional investors - trillion-dollar boys like BlackRock and Vanguard.
They manage $20+ trillion in assets. It’s up to them to decide what a stock should be worth. Don’t get me wrong - institutional investors do compute P/E and P/B and tons of other ratios. They also use complex matrix equations to figure out companies’ worth.
They know a great deal about their buys. BlackRock is holding 7% or $189 billion of Apple stock. It’s naive to think the asset manager doesn’t know in detail what’s going on with the iPhone manufacturer.
You and I don’t have access to this information.
So who would you trust more, a guru on X or someone who decides where trillions of dollars flow?
Institutional investors are bargain hunters. They know when a stock is undervalued and buy it at a discount. They want to make money like you and me.
This means you should invest with them to minimize your risk. Problem is, their buying doesn’t disturb the price. They don’t want you to discover what they’re doing.
Technical analysis can help you track institutional investors’ activity. Follow these guidelines to discover their presence:
They accumulate slowly, often over several months.
They don’t disturb the price. Speculative price runs are not them.
They buy within a price range. They won’t buy below and above that range.
Case in point: Pinterest
I want to show you how price charts look during institutional accumulation. Pinterest ($PINS) is our case in point because it’s a large well-known company with high institutional interest.
It was clear in 2022 $PINS would grow. You couldn’t tell when or why but you could tell something good was going on.
Can you see $PINS stock getting stronger in 2022?
If not, let’s add a few elements showing the stock price stuck in ranges (=institutional accumulation).
Note how the range went up a bit in 2023. The institutions hiked Pinterest’s fundamental value. They most likely knew that the company’s earnings were going to improve soon. Note how the stock went back to the same price range after a correction in April / May of 2023. It wasn’t a coincidence.
You may ask how I know institutions were accumulating $PINS stock. What if other factors could’ve confined the price to that range? Fair enough.
Let me tell you how I know.
With thousands, if not millions of people trading $PINS stock every day, there’s no way the price could’ve stayed within a well-defined range. Making it stay there required a large influx of money and automatic orders to buy the stock within that range.
I went to www.nasdaq.com (Market Activity -> Stocks -> [stock ticker] -> Institutional Holdings) and confirmed there had been institutional accumulation over the last three months. The information on nasdaq is 1,5 months old but it’s OK for long-term holds.
That’s your edge in the stock market.
I’m not suggesting you should rush to buy stocks. My goal is to tell you what works and what doesn’t. The stock market isn’t based on ratios in 2024.
You must always follow institutional investors if you invest in individual companies.
First, look at a stock chart and find potential accumulation patterns.
Second, go to nasdaq and confirm.
Third, check the company’s fundamentals and make sure it has a moat.
Technical analysis is a powerful technique used by market professionals for trading and investing. It takes years to master. This post explains the foundation of technical analysis.
I can’t always find a buy zone. Some charts are messy showing emotional retail trading. My rule of thumb is to stay away from a stock if I can’t figure out who’s in control of price.
Even if you find a buy zone, don’t expect the stock to only go up. You still may have to brace up for volatility.
Following institutional investors has one goal - to reduce your risk.
The bottom line
Reading about stocks on the Internet can do more harm than good.
You’re an average investor if you’re doing what everyone else is doing. “Popular stocks” and “stock recommendations” will get you nowhere because you’re the last person to read about them.
Your edge is to follow institutional investors for long-term holds.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.
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Hey Denis, I was mostly out of my depth here, haha, but I understood and appreciated the main points. I'm an extremely risk-averse person, so I don't have any desire to buy individual stocks, haha. But it was still intriguing to learn about this!
Nice insight Denis. Institutional buying and selling is rarely something I place much weight on to be honest, but I enjoyed this article and I'll try to add it in to my investing.