Students often ask me “Is there a way to consistently trounce the S&P 500?”

And there are lots of people, investors, academics, and professionals alike, who will tell you – and truly believe – it can’t be done. So can you really beat the markets?

As a finance professor I’m here to give you an unequivocal… Yes!

It can be done…

Academics Say The Markets Can’t Be Beat

You see, academics in the financial world have won Nobel prizes for research saying that the markets are so mathematically precise in their efficiency they can’t be beat.

• This gave rise to the simply wacky Modern Portfolio Theory with its “beta” as a yardstick of individual stock performance against the S&P 500.
• Then a flood of academic papers rolled in which clearly documented high-yield market-beating “anomalies.”
• These ranged from newly issued stocks to international equities – both had inexplicably high returns from an efficiency perspective.
• Cutting edge finance researchers realized that a whole new market paradigm was needed where beta is not fully linked to the market proxy but to individual investor behavior.

We can do even better…

Because it may come as quite a shock, but human behavior is not mathematically precise. (Ok, that shouldn’t really shock anyone.) Our collective market actions are often based on fuzzy thinking, emotion and psychological quirks.

Because of this, some stocks are simply set up to outperform the market – often radically so. If you know what to look for, that is. And I’m going to show you how. Here’s a quick glimpse of how to spot diamonds in the rough and how to measure the expert’s opinions on it.

The Biggest Market Movers – Methodically Track the Herds

Unfortunately, little-guy stock investors like you and me don’t move the market much. Seismic, market-changing movements come from the big money managers on Wall Street.

Their buying and selling is funded by millions of employees pumping trillions of dollars through their retirement funds – like 401(K)’s and IRAs you yourself may have.

• These fund managers roam Wall Street like steamrollers. Much as elephant herds roam the African savannah – everything gets out of the way of both.
• If one of these funds pumps money into a stock, the flow can be measured in the hundreds of millions of dollars – often over a few weeks. This elephantine buying of a large mutual fund drives up the value of the stock quickly.
• As the herd mentality of Wall Street takes over, others follow. Elephants move in groups – and where you find one, you’ll find many others.

So how can you tell if a monster fund is injecting capital – with a gargantuan hose – into a stock you’re watching? Simple. There’s an extraordinarily easy way to tell of your stock is being acquired. It’s called Institutional Ownership.

Beating The Markets With Institutional Ownership

Insititutional Ownership is as easy to track as using your Internet browser is. There are a number of sites you can find this out. But one I find most helpful is http://finance.yahoo.com/.

• Type the stock symbol of the company into the “get quotes” form on the upper left part of the webpage.
• When the page for the company information comes up, click on the “Key Statistics” link.
• Then on the same page in the “Share Statistics” section you’ll see the value for “% Held by Institutions.” This tells you how much of the company the big funds own.

For instance if I enter “F” for Ford, I see that today’s institutional ownership is 44.6% of the company shares.

I teach my MBA students that in financial analysis we really don’t care as much about the specific level of a number “snapshot,” but more importantly how the value changes over time.

Print off, or record and save the Yahoo Finance web page for “Key Statistics” each week and you’ll see for yourself how institutional ownership is changing. If fund ownership is going up you should consider buying the stock. If institutional ownership is going down you shouldn’t necessarily sell but you might consider tightening your trailing stops.

Watching these elephants start to pile into a stock is one of the surest ways to know you’ve got a diamond on your hands. It’s simple, it’s easy, and it’s incredibly profitable.

Here at Investment U, we have a whole new way of thinking about the markets that revolves around market beating “anomalies” like this.

After thoroughly researching more than 100 years of stock market history, I can tell you that the market can be beaten, and that there are more ways to do it than you can imagine.

It all starts with education,

Dr. Scott Brown
Investment U