Forced selling and buying and why you should expect to beat institutional investors

I recently [posted](https://www.reddit.com/r/ValueInvesting/s/evkYxzA7iA) about how the fear-driven sell-off across software stocks is a gift to value investors, which led to lots of interesting discussions in the comments with many of you. (Thank you!) One thing that came up over and over was the idea that institutional investors “know something” that we individual investors *can’t* know, and that we *must* be missing something. Now, I don’t know what everyone else knows. Nobody does. What I *do* know is that institutional investors are extremely disadvantaged during extreme market conditions, because they are often forced to act irrationally for reasons that have nothing to do with fundamentals and everything to do with the rules governing their funds (which are called “covenants”) and because they have investors to answer to. For example, many funds have to maintain a minimum allocation % to different asset classes, and funds suffering large drawdowns often have to deal with investor redemptions. Respectively, these two common scenarios create a lot of forced buying and forced selling during periods of extreme market volatility. When a fund sells its tech holdings due to \[reasons\] and wants to go to cash but, due to its covenants, is *forced* to buy stocks, what do you think they buy? They buy the closest thing to cash that they can: stable, steady, defensive, predictable businesses like Walmart and CostCo. That is how we arrive at Walmart trading at 45x. Understand this: institutions are wearing handcuffs, and although they have Bloomberg terminals and various other premium data subscriptions, they do not have the freedom to act that you have as an individual. You don’t have to buy “safe” Walmart at 45x. You don’t have to sell at the bottom due to investor redemptions. You don’t *have* to do *anything*. If institutional investors had the secret sauce, they wouldn’t trail the market on average. If hedge funds had the secret sauce, they wouldn’t have a median lifetime of \~3-5years before going broke and closing down. Exercise your freedom to buy low and sell high. You will outperform the institutions and outperform the market. Patience and flexibility are your shield and sword.