The stock market is dominated by institutions such as banks, mutual funds, insurance companies, investment advisers and corporations. As an individual investor, you might be intimidated by this fact, but you really shouldn't be. From your perspective, the influence of these "buy-side" institutions is less of a negative than a positive for you.
The bad news for you is that you're not an institutional investor. You don't have access to all the information available to institutions; you can't assimilate and analyze all the data you're barraged with as quickly and as thoroughly as they can. Information is valuable, and timely information can be very valuable. Not surprisingly, when something new happens, large institutions that control millions of commission dollars are likely to get the first calls. In addition, they can rely not only on the analyses of the Wall Street brokerage firms, but also on their own in-house talent. In theory, large institutions have an advantage over smaller institutions, and smaller institutions over retail investors like yourself.
The good news is that you're not an institutional investor. You don't have to face the extraordinary pressures to be right and right now. Institutions are increasingly being judged on quarterly performance, a time frame that precludes investing in any real sense of the term-that is, for long-term success. The demands for short-term results, particularly from those who control the various pension funds, often force money managers to go against their better instincts. In this fast-paced environment, no one wants to own the out-of-favor groups, and no one feels comfortable watching the current favorites from the sidelines.
Portfolio managers learn that, in many ways, it's better to be wrong than stupid. Which is to say, when you're wrong, make sure you've got a good reason. And there's no better reason than a stack of research recommendations and no better place to hide than in a crowd.
It is extraordinary to think that an industry comprised of such intelligent and rational people could increasingly find itself working under such irrational requirements. Perhaps the impressiveness of the participants is to some degree responsible. Portfolio managers, on the whole, are a formidable group knowledgeable, articulate, and hardworking. They make the goal of short-term performance seem more attainable than it really is.
And if that short-term performance is lacking from one particular money manager, there are hundreds of others who will have done better in the latest quarter and are eager to explain why they will keep doing better. Meanwhile, those who have underperformed find themselves under the gun to perform better, and soon. To hell with long-term investing, they think; Keynes said that in the long run we're all dead, and just look at him.