One reader emailed me with the following question:
Could you explain the difference between smart money and dumb money? I know the traders lure us unsuspecting people into the market like they have over the last 2 months or so then sell their holdings and then go short and wait till the bag holders start selling again and then cover their shorts and start buying again apparently from the Dumb money people.
Is this close to reality?
Nobody is luring you into the market. It’s a decision you make and no one else. It sounds to me that you have a trader’s mentality (short-term), which puts you automatically in the loser’s column most of the time. There are very few short-term traders who consistently make money year after year. Many try but most fail.
Your comment makes me believe that you have lost money over the past couple of months; otherwise this question would be moot. Nobody is out to get you, but chances are that you work with pre-set stop losses, which get filled at the most inopportune time giving you the impression that you are being shafted.
To me, once sell stops are placed ahead of time, they become public knowledge to those executing the orders. This is why I never recommend placing stops in that fashion. If you base them on closing prices only, and they get triggered, then enter the order the next day.
You might want to consider using a different approach.
I have some clients who have divided their pile of investment money into two parts, named “play” money and “serious” money. Since they are interested in the market, they use their play money to satisfy what I call the need to gamble and take risks. I handle the serious money, which is to be invested with discipline and for the longer term.
To me, smart money is represented by those investors/advisors who work with an investment discipline, which supports clearly defined entry and exit points. At the same time, they are in control of their ego by seeing the need to take small losses from time to time in order to avoid the big ones.
Dumb money is the just opposite in that those investors are relying more on hope than anything else by not having a clear buy/sell strategy or any idea when to get out of a position. That, unfortunately, is the mode of operation by the majority of the investing public.
Comments 5
Ulli,
Wow looks like someone struck a nerve in you. I picked up on some anger in the first half of your latest message. You are right in the later part of that message about the majority not having much of a clue as to what to do in the market etc. Most of my friends just keep making the same mistake every time we have another bear market and that is lose and say why didn’t I get out.
J.B.
JB,
No, no anger at all. Just facts based on my experience.
Ulli…
Ulli,
I’d appreciate (and perhaps other readers as well) your expanding on the use of stops. I currently put them in place on any position with an ETF or stock since I cannot watch the market. Have you done any testing (like with your hedging strategy) that indicates using end-of-day close and some type of exit the following day is better than keeping a stop order on the books? Thanks.
I appreciate your thoughts on exit strategies. Being at work during market hours, I’ve often relied on sell stops, which I reset based on closing prices. Granted, they’ve sometimes thrown me out of positions at inopportune times, but they’ve also saved some profits and limited some losses.
If I switched to alerts and submitted market sell orders before the next opening bell, the opening volatility could hurt since I couldn’t be sure what price my shares would bring. It’s too bad that I can’t delay submitting morning trades until the market has opened and settled down.
I think the guys statement is basically true in general. I dont think he was personalizing the dumb and smart. That is how the mkt moves though. It doesnt move by Ulli's investments. It moves from the institutional investors and the hedgies the big money. Trend following trys to grab the middle. Since the mkt is zero sum, the profit the hedgies are making comes from somewhere. Its the uninformed that should find someone like Ulli to do their investing. Otherwise the lure to invest money at the top is hard to resist or get out at the bottom when one cant take the pain any longer is the capitulation.
I am not so sure there are lots of little old blue hairs with lots of money in utilities or corp blue chips like GM, Ford, Beth Steel, AT&T; (old one)or you name it anymore. That money got clipped in 2000 and 2008. Someone has to get sheared. Certainly this last 40% rise is not based on profits or earning or even a 6-9 look into the future on earnings. Heck the mkt moves up when only 350K lose their jobs. It wasnt long ago that if 30-50K got sacked in a month the mkt wud dive big time.
So who starts the big downward spiral in the mkt anyway. Who decides when it was time for the the tech bubble to burst. The coupling between the mkt and the economy is not real close anymore. What is good for Wall Street which use to facilitate corp America finance their expansion is not the biz Wall St is in anymore. Most of what it does wrecks industrial America and makes a big profit doing it.