One thing that many investors look for to confirm that they own a good company is institutional ownership. This is the percentage of shares that are owned by institutions: mutual funds, hedge funds, pensions, and so on. The theory is that the professionals who run these funds are highly knowledgeable investors, who have done high levels of research and are unlikely to make a mistake.
It's a nice theory. It's garbage, but it's a nice theory.
When it works
But there are two things that do interest me. First, as a negative, if you see a company that has minimal institutional interest (or, more likely these days, institutional interest that primarily comes from indexers), then I am pretty sure that there's something deeply wrong with the company.
Let me give you an example: Institutions own approximately 5% of Research Frontiers
By the same token, companies with extremely high institutional ownership are most likely well known on Wall Street (sort of an obvious statement) and aren't as likely to offer as much value. The mathematical approach here doesn't make much sense. What does make sense is a study of what the best investors own. This doesn't mean that you run out and buy blindly when Warren Buffett buys, but let's face facts -- if you had bought PetroChina
The thing is, Buffett may be at the top of that list, but he's not the only brilliant investor out there. Leon Cooperman filed that his fund (Omega Advisors) has bought 6% of Resource America
If you're an owner of CrosstexEnergy
Does the ownership by these best-of-class investors spell certain glory for shareholders in these companies? Certainly not. Many of us watched in amazement as Mason Hawkins and his gang defended their position in packaged-goods company Fleming back in 2002 as it roared its way straight into bankruptcy. No, the contrarians are sometimes very, very wrong. But seeing some of the best and the brightest holding -- and buying -- companies you own is a pretty good sign.
Of course, if you're looking for a good few ideas each month, you can also join Fool co-founder Tom Gardner and me as we turn over rocks, stones, and the occasional yak to find the world's great small-cap companies. A free 30-day guest pass to Motley Fool Hidden Gems is yours with my compliments. Just click here for more information.
Bill Mann is worried that he won't be able to speak Chinese after the operation. Of course, he doesn't speak Chinese now ... and there's no operation. He holds shares in Acusphere. Muhlenkamp is a Motley Fool Champion Funds recommendation. The Motley Fool has a disclosure policy.
More from The Motley Fool
You Need to Hear the SEC's Warning on Cryptocurrencies and ICOs
Before you invest in the next hot ICO, here's what you need to know.
Americans Say It Takes $2.4 Million to Be Wealthy. Here's How to Get There in Time for Retirement
Think you'll never be a millionaire? It's easier than you might expect.
Better Buy: Amazon.com, Inc. vs. Google
We pit these two market titans against each other to see which is the best investment today.