According to a recent Wall Street Journal article, all across the nation, tech companies are figuratively hanging out signs reading, "Individual Investors Need Not Apply." The companies are shopping their shares around specifically to institutions rather than small investors, hoping that the institutions will prove more "stable" and long-term shareholders. It's certainly any company's right to make that decision, but I have a sneaking suspicion that companies that dump individual investors to seek the affections of institutions may be surprised to find themselves suddenly jilted in turn.
The Journal prepared a colorful bar chart illustrating how the institutional ownership of several companies has increased markedly over the past year. Linux-tinkerer Red Hat
One thing all these firms had in common, according to the Journal, was a belief that if they could attract more institutional shareholders, this would reduce the volatility of their share prices. Large institutional shareholders would be "partners" in their business and stick with them through thick and thin.
Yeah, right. When monkeys fly out of my, er... prospectus.
I fear that these companies, on the rebound from failed relationships with individual investors in 2000-2002, are idealizing their new paramours. The companies have forgotten a little phenomenon called "window dressing," which is common in the mutual fund industry. Before it comes time for mutual funds to 'fess up to shareholders about what companies they own, funds will often sell off their losers -- their scandal-plagued Tycos
Meanwhile, small investors, for better or worse (hint: usually worse), have a deep psychological aversion to selling stocks that have fallen upon hard times. Small investors will often -- their better judgment notwithstanding -- stick with a company through thick and thicker in hopes its stock will eventually rebound so the investor can "break even." That may not be a great investing strategy. But it's a fact, and it belies the theory that individual investors are the ones most likely to dump a stock when it's down.
For more Foolish thoughts on the psychology of investing, consider:
- Bill Mann's musings on herd mentalities, optimism, and other investing phenomena.
- Selena Maranjian's warnings against bad investing habits.
- Roger Friedman's confession to still owning Ballard after its fall.
Fool contributor Rich Smith owns no shares in any company mentioned in this article.