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Smart money Dumb money

November 21, 2007

Mark on the markets

Smart money, dumb money

Many professional traders and institutional money managers refer to the retail investor as dumb money, because most retail and individual investors tend to make money in the markets short term, but ultimately lose money in the long run. The stock market, bond market, commodity markets are all cyclical. They have up phases (bull) and down phases, (bear) and inside all these up and down cycles are smaller cycles. For instance, the last 4 years have been a bull cycle with small cycle corrections to the down side. The smart money or professional traders have bought stocks on these pullbacks. Until very recently, it seemed as though the media and mutual fund managers were very bullish, and vocal about the markets. However, even though the managers were talking up the markets, so the individual investor would keep buying, the smart money was selling.
If you watch the markets on a regular basis you will notice that since august, any rallies to the upside cannot be sustained, the market has rallies that are primarily short covering rallies. A short covering rally is when traders have shorted stock in hopes that it goes down in price, but up in value if you shorted the stock. To close the transaction you must buy the stock, which can cause the market to go up with short unsustainable and often violent rallies.
Many sectors of the market have their own cycles. Financials have corrected 25% or more and started to turn to a bear market much sooner than technology which has pulled back very recently, but may not go into a bear market. Mining and materials recently pulled back as well, but may not turn into a bear market. Home builders have been in a bear market for sometime now and have lost 60% of their value or more this year.
There is typically a bull and bear market happening simultaneously, all the time. This is why you must adjust your portfolio of investments on a regular basis. You must take profits when it is time, and buy when it may seem like a stock or sector is bottoming.
The smart money sells when it seems everyone is buying and buys when it every else is selling. Fear and greed drive the markets for most investors.
Pay attention, educate yourself about the markets, and do not listen to the TV stock guru’s, whose recommendations are unreliable and tainted. Be the smart money!

Mark Patterson is a registered investment advisor with MHP Asset Management LLC, and can be reached at 447-1978 or Mark@MHP-Asset.com