Institutional investors -- aka, "the big money" -- make up most of Wall Street's trading volume, so it's worth keeping an eye on what they're doing because it can impact stock prices in the short term.
For proof, look no further than these past few weeks, when many large technology stocks have begun sliding. Recent data indicates that in June, hedge funds and other institutions sold technology stocks at their sharpest pace in years. AI chip leader Nvidia (NVDA +0.64%) was among them, and its shares have now fallen by more than 16% since peaking in June.
Why are these ultra-wealthy traders selling, and should Main Street investors follow them?
Why are billionaires selling Nvidia?
Billionaire Stanley Druckenmiller, who runs a $3.7 billion investment firm called Duquesne Family Office, was a bit ahead of the trend. He sold 70% of his stake in Nvidia in Q1. Now, it seems others are doing the same. But Nvidia and other technology stocks have soared over the past 18 months, and they are still way up -- so why sell?
In the competitive hedge fund industry, there's a natural emphasis on short-term results. Hedge funds that bought large technology and AI stocks at any point in the first six months of 2023 are likely sitting on massive unrealized gains. For example, Druckenmiller's estimated average cost basis on Nvidia stock is under $20, so he sold shares for a huge profit.
It looks like his peers have begun doing the same. That doesn't mean Nvidia is no longer a leading AI company or that it can't be a great long-term investment. It's just that hedge funds prioritize short-term gains.
NASDAQ: NVDA
Key Data Points
Your advantage over billionaire investors
It can feel like billionaires have some unfair advantages in the stock market. Hedge fund managers use cutting-edge technology, employ brilliant analysts, and have access to industry insiders. Yet, most hedge funds underperform the S&P 500 over long periods. How could this be?
The simplest way to do well in the stock market is to buy shares of great companies and then do nothing but hold on for many years. That's why the Motley Fool emphasizes a long-term investing strategy.
Hedge funds don't follow that pattern -- they must justify their hefty fees and one-up each other to keep clients from pulling their money out in favor of a different fund. After all, hedge funds are indeed a dime a dozen -- there are more than 3,800 in the U.S. alone, but fewer than half stay in business for five years.
Individual investors answer to nobody but themselves. In the Internet age, anyone can research and learn about great companies. Once they find a winning stock, they can hold it for as long as they believe in the underlying business without feeling pressure to show returns every month, quarter, or year.
What should investors do with Nvidia stock?
Nobody knows where Nvidia stock will go from here, but its business has grown tremendously thanks to its dominant position in the AI chip niche. Companies will need to continue investing in AI, but for Nvidia to maintain the growth it has achieved over the past 18 months, it will need to keep innovating and protect its market share from competitors that are developing rival chips.
There is nothing wrong with booking some profits by selling some shares when your investments are up. You could easily sell a portion of a winning stake and still keep some invested for the future.
Those who want to buy Nvidia on its recent dip should consider using a dollar-cost averaging strategy, which entails building out your position gradually, investing set amounts at set intervals until you have put as much money as you plan to into the stock. That method can help protect you from unlucky timing if the share price keeps falling, but also gives you immediate exposure if it starts to rebound sooner.
In other words, investors should do what they feel is right. Just don't base your decision on what some hedge fund managers may be doing -- time often proves their decisions wrong anyway.
