The term ‘institutional investors’ is thrown around in the stock market world in reference to a lot of famous investors, big hedge funds, and banks. But what a lot of people don’t know how they get the title. Do you have what it takes to become a ‘Whale of Wall Street’.
An institutional investor is a person or company that invests in securities on a large scale. Some examples of these are banks, mutual funds, and insurance companies. They buy and sell huge amounts of securities and this is why they are often eligible for preferential treatment and lower brokerage fees.
Right now, you are a retail investor, investing your savings or bonus cheques, which is more than fine. But just because you’re investing $500 per month instead of $500,000 per month, doesn’t mean you can’t trade like an institutional investor. There are strategies you can apply to your portfolio which can dramatically increase your portfolio’s success.
Investment companies are regulated primarily under the Investment Company Act of 1940, and also come under other securities laws in force in the United States.
How to Trade Like an Institutional Investor
Just because you don’t have a fancy office in New York, or 5 computer screens with graphs on, doesn’t mean you can’t invest like an institutional investor.
There are quite a few ways you can become a stay at home institutional investor, or maybe even open your own ‘institute’ investing firm and take on the big fish.
These are the ways you can invest like an institution:
Invest in Funds
As I mentioned before, institutional investors are institutes!
Mutual funds, ETFs, or investment companies such as Berkshire Hathaway, they are all institutional investing firms. If you invest in these types of stocks you will effectively be investing in the same securities as they do. This is the simple way of stealing the ideas of the big Wall Street Whale.
If you think of it this way… The managers of these investment firms invest capital from shareholders, so the money you invest in the shares of the firm will go towards the investments made by the company. If the company performs well, you will gain profit through dividend or share appreciation.
Some great examples of good funds or investment companies to buy are listed below:
|Asset||Current Share Price||10 Year Gain|
|American Century Investments Focused (Mutual Fund)||$38.87||+319.91%|
|Berkshire Hathaway Inc.||$190.82||+171.86%|
|Vanguard S&P 500 (ETF)||$287.02||+182.00%|
By investing into the companies that are considered Institutional Investors, you can make the same profits as them with very little work.
Become a Value Investor
The great Warren Buffett has said people focus on quick wins and small time payouts.
Value investors look deeper into a company’s life, they focus on 10 year goals. If you look at some of the giant companies we have on the market today, like Apple, Coca Cola, Microsoft, and Amazon they have grown over a long period of time. Many new retail investors look at small companies that have hit rough times, buy up some stock, then when they reach a small profit they cash out.
Why not spend some extra time researching companies that have longevity in the market, and that provide the world with goods that will be in high demand for years to come.
If we have a look at Berkshire Hathaway’s current holdings, the company Warren Buffett owns, we will see how much he values long term stocks with high potential for growth.
You can see from this pie chart that he values sustainability. Companies with short term gains do not interest value investors, companies with long term growth do.
The best quote from the greatest value investor to ever live is as follows:
“My favourite holding period is forever”Warren Buffett
Asset Allocation of Institutional Investors
Asset allocation is how institutional investors manage risk across their portfolio.
The standard allocation for an institutional investor is:
- 40% Equity: Company Shares, Equity Mutual Funds, Futures, or Options. These investments will build a strong growth base for your portfolio.
- 40% Fixed Income: These are safer investments such as Government Bonds, Debt Equity Bonds, Savings, or Insurance Bonds
- 20% Diverse Income: These are more diverse investments such as Real Estate, Private Equity, or simply cash. These will hopefully protect you against losses sustained in the broad stock market. You can easily find real estate funds which don’t react to broad market corrections.
These are by no means set in stone, you need to evaluate your own risk tolerance and set your allocations accordingly.
Even in todays market with huge growth institutions still stick to this simple allocation template. There is still some variance however, equities have seen massive growth over the last 40 years, in 1980 only 18% of institutional assets were held in equities, now it is much higher.
An informed investor is a successful investor. If you think the managers at Vanguard are sitting at the computer screen, rolling dice to see which company is going to up or down, you are mistaken.
Retail investors think the market is always against them… Either they get into a company to late and miss out on all the profit, or they complain that the market isn’t reacting to certain companies.
Unfortunately it is not the market that is against us, one day it might be the banks, the other day it could be the government, and sometimes it can be our investments competitors. When investing like an institution, it is imperative that you check your emotions and excuses at the door.
You need to throughly research a company before investing, don’t jump on the band waggon your favourite YouTuber is talking about. Don’t dive into a company that has sunk to the bottom. Learn what makes a company a good investment and be disciplined in your approach.
The difference between retail and institutional investors when it comes to this approach is… Retail investors are happy to bet their own money, whereas institutional investors are betting other peoples money. Think about your investment in the same way you would think if it was someone else’s money you were investing. Check the earnings reports for the last 5 years, check news stories for the last 6 months, research the CEO and other high ranking officers, and learn about the competitors in the industry.
You are about to become a shareholder of a company, a member of the organisation. You need to know what you’re getting yourself into. Otherwise how will you know if the company is doing any good?
Retail Investors vs Institutional Investors
The differences between retail investors and institutional investors are mainly based around experience and industry knowledge. But it is really easy to tell if you are investing as a retailer or an institution.
Look at these 5 questions:
- Do you invest based on news stories?
- Do you follow trends or a crowd of excited people?
- Do you understand the concept of intrinsic value?
- Do you spend more time researching or buying?
- Are you focused on one particular area of investing or a wider gaze?
Answer these honestly, because their are no wrong answers.
Investing based on the news isn’t a bad thing, but you need to know how much value is in the underlying asset. If Apple announce a release of a new iPhone, the share price is likely to increase. But if Waste Management announce a new way of recycling, not as many people are interested, hence the value of the underlying company isn’t worth as much.
If you follow the herd when investing, you need to stop. By doing this you put your money in the hands of strangers. I can already tell if you trade based with a herd mentality, you don’t understand the concept of intrinsic value.
Intrinsic value is the value of the asset not the share price. You need to evaluate how much a company is worth, and see if it over/undervalued based on where the share price is. There are many online calculators to help you do this, but I recommend developing your own strategy of finding value based on what is important to you.
You can get my personal intrinsic value calculator on our Investing Essentials page for free.
Now, focusing on one industry is smart for retail investors because they invest in what is familiar and safe. But it is very important to research other industries and branch out. You will find an industry wide correction can occur in almost all markets, that is why we need to diversify our portfolio.
Institutional Investors to Learn from
The main institutional investors in todays market are:
- Asset Managers
- Endowment Funds
- Hedge Funds
- Insurance Companies
- Investment Companies
- Investment Trusts
- Mutual Funds
- Pension Funds
- Unit Investment Trusts
These next 7 institutes have made huge strides in investing, they are the ones to follow, learn from, and seek insight from. Look at previous investments and figure out what made them profitable, and how you can copy their strategies.
|Institute||Assets Under Management (Millions)|
|Vanguard Asset Managment||$4,222,043|
|BNY Mellon Investment Management EMEA Limited||$2,650,837|
|J.P. Morgan Asset Management||$1,675,375|
|Goldman Sachs Asset Management International||$1,264,757|
The Sad Truth
Institutional investors have billions of dollars behind them which allows for massive investments across a lot of vehicles.
Unless you are able to gather that much capital you will be seen as a retail investor, but you don’t have to trade like one.
You may miss out on the big discounts institutional investors get from the Wall Street brokers, however there is a solution… Don’t use them.
You can get a free investing account from M1 Finance, Trading 212, or eToro today, with no upfront fees or commissions. You can check out my reviews . of the brokers here, or head straight over to their websites to find out more.