I have never been one to follow the herd (although some would argue otherwise) but I have to admit when it’s my money on the line, I tend to play it safe. This is especially true when I lost beaucoup de bucks on penny stocks. Never again and I vowed to myself that I would become better at stock market investing.

My investing for beginners strategy now is to buy blue-chip companies. Unfortunately, most of these companies trade at a premium price for their brand. There is also heavy institutional ownership in these companies. Is this good or bad?

How much is too much institutional ownership?

There is a chapter in the book “Stock Market Rules” by Michael Sheimo that deals with this topic. I like this basic investing book because it challenges axioms like “Institutions Show Where the Action Is Now”. Sometimes, investing basics is fraught with old ideas that might not hold true for today’s beginner investor.

Let’s face it, there are not too many good companies out there that don’t have institutional ownership. They tend to be market leaders. And, having these no brainer companies in your portfolio won’t get you fired if you’re a fund manager. Mutual fund investors don’t question Google, Microsoft or Yahoo as top holdings – which were all in the news recently.

In Google’s case, it was due to a lower than expected fourth quarter earnings report. And then Microsoft dropped a bomb late last Thursday by making a bid to buy a struggling Yahoo for $44.6 billion.

Look at the institutional ownership in each of these companies, the jump in trading from the average volume, and the share price at Friday’s close.

If you are a small-time individual investor, you might have gotten sucked into the eye of the storm.

It’s good news if you are a Yahoo shareholder as the stock price went up over 47%. For a Microsoft shareholder, the news wasn’t as well received by the Street who thought the bid was too generous. And if you’re a Google shareholder, the news of competition might be worrisome.

Institutional ownership does show where the action, but is it too much action in this case? It’s good when institutional money rushes in but it can go the other way and rush out as well.

That’s why there’s another “rule of thumb” in investing basics that you shouldn’t invest in a company that has more than 20-30% institutional ownership. However, as already mentioned, it is hard to find such companies. I took examples of tech stocks that tend to be more volatile but defensive stocks such as Proctor & Gamble, Johnson & Johnson, Coca Cola all have institutional ownership around 60-65%. Does that mean you shouldn’t invest in these iconic companies either?

I say screw it. Even investing for beginners, it is okay to take a stand. What matters is that you believe where the company is heading after thorough research and that its shares are trading at or below fair value. If your views are in line with the institutions, so be it. If it’s not, you will be in front of the stampeding herd and ride the wave of big institution money.

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