How Fund Managers Think
                       In order to beat the S&P 500,  institutions  must  bein the right sector and in the right names. Their goal is not just to  matchthe S&P 500; they want to beat it.  In  order  to  achieve  this  they  mustdiffer from the Index. To help accomplish this  they  have  built  excellentinternal research capabilities and, in addition, they  have  access  to  thebest brokerage firm research that is available.                        There  are  many  talented  analysts  and  portfoliomanagers at these institutions so there isn’t much left  to  chance  in  thesearch for good companies. They get page  one  information  because  of  themulti-millions of dollars they pay in commissions to the brokerage firms.                       Most  growth  fund  managers  are  bottoms  up  stockpickers, which means they closely examine the  business  prospects  of  eachcompany and build their portfolios stock by stock. They adhere to  the  factthat stock prices tend to follow earnings over time, and to the extent  thatearnings forecasts are revised upward or downward, stock prices  often  willhead the same direction. Most managers don’t try to predict near term  stockperformance. Instead, they spend their time looking for companies  that  cangrow earnings faster than  the  overall  market  and  that  are  trading  atattractive valuations. There are many factors that can make stocks  rise  orfall over the short term, but in the  long  run,  earnings  determine  stockvaluations. Therefore, a fund  manager  looking  for  the  best  chances  ofappreciation  will  choose  those  stocks  that   are   fairly   priced   orundervalued.      When mutual funds receive new money, a fund manager will often add  toexisting  positions  as  long  as  the  fundamentals  remain  solid  for   aparticular stock. This  assumes  a  stock  still  has  strong  relative  andabsolute performance to the S&P 500, and it is this buying  that  creates  atrend. A fund manager will attempt to buy good stocks on pullbacks and  sellweak stocks on strength. Many of the momentum  players  just  want  to  keepbuying if the stock is up, but as soon as they have any  sizable  amount  ofshares offered to them by a brokerage firm’s trading desk  they  might  justdisappear and turn seller themselves because the stock has reached a  supplylevel and the stock can’t be pushed any higher until the seller(s)  completewhat they are trying to get done.                       The herd mentality prevails when it gets down to  thehigh relative performance stocks such as we have seen in the technology  andInternet sectors. A fund manager may think there is a high  degree  of  riskin certain tech stocks, but those companies may be producing  fast  earningsand helping the performance of the fund in the battle to beat the  S&P  500.(So they might even stay too long.) This helps prolong the upside action  aswe get multiple upside breakouts after brief pullbacks. With a  little  helpfrom momentum players, programs, hedge funds and the media  hype  that  goeswith these stocks, you are given many opportunities for strong  day  tradingaction.