Are You Smart Money?

[MadMarketScientist 11]

Great article from the Jeff Clark ...

----

 

You've probably heard the term "smart money" used by various pundits, a reference to those investors and institutions that are consistently better at making money than the uninformed masses. Which begs the question: are you one of them?

 

To answer that query, let's first describe smart money (not to be confused with the magazine by that name) so we have an idea of what makes this group of investors successful...

 

Smart money buys when others are fearful. A good example of this is last year's Gulf oil disaster. Wild speculation of British Petroleum's ultimate demise caused panicked bouts of selling. The stock lost roughly half its value in less than two months. To use a classic idiom, there was blood in the streets - and that, of course, was the time to buy. The investor who did so is currently up 50%, and that's not even measuring from the stock's absolute bottom.

 

Smart money sells when others are greedy. My colleague Doug Hornig is a perfect example of selling when others are greedy. In the Nasdaq hysteria of the late 1990s, Doug had accumulated a number of Internet stocks and watched his brokerage account swell to a level he'd never seen before. The greed around him was palpable; everyone was talking about the latest stock pick, the classic sign of a mania in full bloom. "But I'd had enough," he told me. "My positions had logged spectacular gains, and bottom line, I knew this couldn't go on forever." He sold his Internet stocks prior to the 2000 top, just as the greed reached a pinnacle.

 

Smart money sees trends others don't. Doug Casey urged readers in 1999 to buy gold, convinced from his own research and study that a bull market was about to get underway. But he couldn't get an audience; no one wanted to talk about the metal or mining stocks. It goes without saying that he and many of his readers have since profited enormously, with many stocks earning doubles on top of doubles.

 

Smart money ignores the headlines. Beyond the traditional advice of "Buy the rumor/sell the fact," smart money largely ignores the blather from mainstream media and instead focuses on the factors that ultimately drive headlines. When it reaches mainstream coverage, the smart money is already invested. And is looking at what will be tomorrow's headlines.

 

Smart money plays the big trend, not the gyrations. What do Jim Rogers, Marc Faber, Rick Rule, Doug Casey, and Warren Buffett have in common? None of them "traded" their way to riches. They identified the fundamental factors driving the trend, bought big, and held on. No technical analysis, no trend lines on a chart, no fancy signals from moving averages. And they didn't get scared out at the first drop in price.

 

Smart money doesn't count its money before it's made. These investors understand there are no sure things, and further, that no one is going to bail them out if their analysis turns out to be wrong. They keep a realistic expectation - and an eye - on their investments. And if they take a loss, they learn from it and refuse to let it keep them from investing again.

----

[BlowFish 10]

"Smart Money" is one of the terms that amuses me. (Though it angers me that it might set struggling traders back). Anyone that uses the term as some sort of catch all is unlikely to have a good understanding of how and why the many different types of participants trade. I think what really cemented it for me was when Tradeguider made the term a cornerstone to their sensationalist marketing.

 

On a practical level making such broad categorisations is unlikely to help a trader understand the markets. To be fair this particular advice may be good for long term speculators/investors whom it appears to target. I wonder if Paul Rotter (one of the more recent 'famous' traders) paid too much attention to such things?

 

Now, these guys might well be respected economists and top notch market analysts for all I know, but I though "smart money largely ignores the blather from mainstream media" was pretty ironic coming from guys that make money selling main stream media. (Selling reports and newsletters since you ask).

 

Maybe I am just an old sceptic, it keeps me amused though

[MightyMouse 12]

Like your other post, MMS, smart money is not always the same traders or investors as the term may imply.

 

Smart money is all the same traders if inside information is being used.

 

I think Williams said that smart money is smart because they can get out of a losing position quicker than dumb money and smart money stays in a winning position longer than dumb money. If that is the case I feel like I am a part of smart money.

 

If you are a new trader and want to be smart money, then all you have to do is stay in a winner longer and get out of losers quicker. It is a group that is open to all. Membership is rather simple. Believing that smart money is all those things listed, is the belief that someone has the holy grail and that is comic book material.

[SIUYA 11]

blowfish and MM say it all perfectly for me.

[zdo 20]

Me? Smart money? I think the "Smart money plays the big trend, not the gyrations" part disqualifies me using those measures. Article infers investors are smart, traders are dumb. Maybe he never saw the Market Wizards books, etc. Haven't enjoyed it, but I've done well across all the years trend and seasonal trading. But my forte has always been much shorter term trading.

 

Per some of those other criterea, like "Smart money sees trends others don't. " I am now starting to allocate some in very illiquid investments, (not trades?)

 

I nominate MightyMouse's

"smart money is smart because they can get out of a losing position quicker than dumb money and smart money stays in a winning position longer than dumb money."

for post of the month!