Something I’ve talked quite a bit about over the past few years in running this blog is the big advantage of the small guy.. the self investor over the big, laboring elephant that is the institutional investor.  You are the nimble, market ninja able to move to cash quickly by cutting losses quickly on positions and waiting for better investing environments.  The big fella has no such advantage because of the requirements to stay mostly invested and the slow process of unwinding positions and moving into new ones.  Institutions are forced to rely on on the financials of the past and management guesstimates of the future to make million dollar bets.  The problem with this approach is the executives lie or are just flat out wrong AND long before the earnings show deterioration, the stock will have already fallen off a cliff.

Case in point, Satyam Computer (SAY) of India.  Now here’s a company …

that continued to show very good earnings and sales growth all the way up to the revealing of the massive fraud.  Had you relied on fundamentals alone or the words of management, you’d be wiped out on your position… and many institutions are.  Taking a look at MSN ownership information, I see that institutions own 20% of this stock with Fidelity, Barclays, MFS Investment Management, Lazard Assets Management, Trilogy Global Advisors, Fred Alger Management, Westfield Capital, Aberdeen Asset, Renaissance Technologies and Merrill Lynch all owning at least a million shares.

It’s possible that some of these institutions were cutting their losses and unwinding positions, but the process is slow and it’s difficult to unload millions of shares.  Not to mention few are probably using sound technical analysis.  You, the self investor, know better.

The stock really began to break down last July meeting resistance and failing at the 50 day moving average on several occasions.  Somebody always knows something and the smart money was clearly dumping Satyam well before the massive fraud was revealed.  No, technical analysis wouldn’t have told you that this company was a sham, but it certainly indicated their were problems.  It’s a stock that offered short opportunity, after short opportunity after short opportunity and yet major institutions with millions at their disposal to research Satyam failed to find the fraud and rode it out all the way to the end. 

Remember, the charts are the only leading indicator you can rely on.  Stick to stocks showing momentum while cutting losses short and you will do very very well.