"Word on Wall Street" are periodic articles that discuss what institutional investors are talking about around a certain stock. This matters because:
- Institutional investors control 90%+ of the trading volumes. They move the stocks.
- Institutional investors are significantly more sophisticated than your average investor.
- What they're watching and talking about are the key issues that matter to the stock.
My posts provide a window into these issues.
Why do institutional investors matter?
In short, institutional investors move the stocks. Institutional investors (entities that pool meaningful amounts of money to make investments) make up ~90% of total trading volumes in the market, with some sources pegging it as high as 96%. This might seem like an absurdly high number at first glance. But it makes sense when you think about it. These guys manage billions of dollars at a time and can make million dollar trades at once. This compares to the average retail investor's trade of ~$5,000.
Where does all of this money come from? Mutual funds, pension funds, 401Ks. That's where most people put their savings, and all of that is being controlled by these managers.
How do institutional investors differ from retail investors?
In my opinion, the average Joe severely underestimates the sophistication of institutional investors. These guys are extremely knowledgeable about the stock and the key issues surrounding it. A few reasons why they know more about a stock than the average retail investor would:
Resources. Funds make a significant amount of money from fees, which are then partially spent on tools and analytics that a regular investor would not have access to. This includes software like Bloomberg terminals, FactSet, Capital IQ, and Thomson Reuters. This software provides historical financials, projected estimates from brokers, financial models and research reports, and other metrics that are not readily available online. Additionally, these funds are often paying for additional research that might provide data points that can better predict sales and profits for a certain company.
Time. This one is straightforward. These guys invest for a living and therefore spend a ton of hours on due diligence and figuring out whether a stock is worth an investment. Each person at a fund might spend 10-16 hours a day analyzing stocks, multiplied by 5-7 days a week. Meanwhile most retail investors might do some research (reading a few articles) in their spare time once a month or two.
Management Access. With increased resources, funds also have more access to senior management at these companies. Thinking about an investment in Home Depot? The major funds will be able to set up a meeting with the director of investor relations to then ask them numerous questions about the business. This isn't illegal; they're not getting material information like sales trends. But they could get details on the exact initiatives that the company currently has underway, and the details that give them confidence in their (publicly stated) 5% guidance for the next quarter. They have access to senior management, which gives them access to more information.
Education. Institutional investors aren't necessarily smarter than your average retail investor, but they probably have a lot more relevant knowledge that would position them to understand stocks better. For example, many institutional investors have their CFA, which requires one to know accounting, economics, and security analysis. Additionally, jobs at large funds are extremely selective and require significant industry knowledge.
Ok, so why does "Word on Wall Street" matter?
The key debates going on on Wall Street among these institutional investors are not accessible to the public. There simply is no resource out there that gathers and explains this information in a digestible format. This is what I aim to do with these Word on Wall Street posts: talk about what Wall Street is talking about.
I spent five years in equity research where I wrote research reports on stocks. Equity research analysts are well-positioned to understand the key issues around a stock because they speak to many different institutional investors (as well as the senior management of the companies they cover). They also spend a significant amount of time researching stocks as well. As a result, my posts are based on my knowledge of the industries, my contacts within the industry, and the research that equity analysts are producing.