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Should you follow the ‘big money' when you're investing?

by , 16 February 2016

I recently received the following question from a Red Hot Penny Shares member, “Francois, should we follow institutional investors when investing in Penny Shares? How do we know where the big money is being put?”

My immediate answer to this is that the big money (institutional investors) isn't necessarily the smart money…

The f act of the matter is, here at Red Hot Penny Shares, we try to beat the ‘big money' to find the really good small shares that are set to soar as they become the giants of tomorrow!

Own tomorrow’s Blue Chips before the ‘big money’ comes along!
 
You see, the penny shares we look at are too small and illiquid to matter to the ‘big money’ institutions. And because they often overlook these small shares they tend to be much cheaper than the rest of the market…
 
But as these shares tell their amazing growth stories, over time, they get more popular. Their prices start to go up, and as that happens the value of the companies increase. They get big enough for institutions to start buying them.
 
If their growth stories are REALLY convincing, the ‘big money’ will eventually flood into them and we’ll see the shares continue massive uptrends like Pan African Resources and DRD Gold have done lately…
 
If we didn’t buy DRD Gold for instance while it was out of favour of the ‘big money’ and many investors didn’t even give it a second glance, we’d never have made the 120% gains on the share that we’ve banked this month. On contrary – our gains would have been 40% or 50% at best if we only bought into it as the ‘big money’ ar rived…
 
Reading the ‘big money’s’ messages can help tell you what happens next

Like I’ve told you, I believe there’s no use in tr ying to follow the big money. You need to beat them to it otherwise you’ll always be a step behind.
 
But knowing what the big money is doing and when they are accumulating shares does help to get an indication of where a share is going…
 
For instance – if you hold a share and there’s suddenly a massive influx of fund managers buying into it, you can be assured the share will be headed up soon. But let’s say the big money is selling out of a share. Then it’s usually bad news… That’s when the investors believe there’s not a lot of hope left for it…
 
And following such an exodus I like to look closely at a share to see if there’s an opportunity to come in and pick up that share cheap – ready for a recovery!
 
This does mean we occasionally get in a little too early on some shares – but when there’s a 100% or more potential gains on the table I’d rather be early than late, or not in at all!
 
How to see where the big money is headed next

It’s actually quite easy for you to check where the big money is heading.
 
You see, institutions need to update and disclose their por tfolio holdings on a quarterly basis. They show how many of each share they hold as well as by how much their holding has changed in the last quar ter.
 
Again – this is hindsight. If we only react to this when we find it out, we’ll be late, but it helps conf irm our views.
 
So, to see this info, all you need to do is go to the moneyweb.co.za website, scroll down to the bottom right hand side and click on ‘Unit Trust Portfolio’.
 
This will then take you to a screen where you can select different shares and then see which funds hold how many of their shares – and how their holdings changed in the last quarter.
 
How the ‘big money feels’ about our PowA! Portfolio
 
Most of the shares in our portfolio do have institutional investors invested in them.
 
Back in 2012 I used this example to see which of the PowA! shares were backed with big money:
 
Share Fund holdings Comment
Coal of Africa (CZA) R61 million Institutions bought an additional 4 million CZA shares in the last quarter!
DRD Gold (DRD) R156 million I attribute the spike in DRD’s price to all the funds realising its true value and buying in!
Pan African Resources (PAN) R167 million The smart money is already in Pan Af and riding out its gains – but we beat them to it!
Sentula (SNU) R121 million Nedgroup Entrepreneur Fund bought an extra 2 million Sentula shares in the last quarter
Transhex Group (TSX) R67 million Funds are buying into Transhex – but haven’t realised its true value… YET!
Zeder (ZED) R124 million Funds bought more than R20 million worth of Zeder in the last quarter

Look at Pan African Resources and DRD Gold for example. These shares have signif icant institutional shareholders, but it’s only after hundreds of percent of gains have been realised that most investors will see it. But we got in early on these shares – and sure enough institutional investors followed – increasing their holdings on them quarter after quarter as they caught on to the massive value in these shares!
 
If institutions are still buying more of these shares, it means they still expect more upside to come!
 
So, if you’re looking to conf irm your views on a share – this is a great tool to use.
 
Just make sure you beat the big money at their game by buying into tomorrow’s Blue Chips today!

Here's to unleashing real value,


Francois Joubert
Editor, Red Hot Penny Shares

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