Nov 13 2008
Dumb money and Smart money
In 2000, I sat explaining two charts to my husband. One was of the crash of ’29, followed by a more dramatic tumble that took place in ‘31. The other chart showed a similar pattern in the Nikkei starting in 1987, and then another, final downturn before the big bear market in the 1990’s. ”See,” I said. “It seems to happen in a similar pattern. First the market drops, then it goes back up, and then it plummets to earth.
He nodded, and said, “That’s when we should be in money markets then, right?” I agreed.
But hindsight has the best vision, and here I am, riding through the very event I knew would come. Why on earth would I have let that happen? The answer is simple: no one knows the timing of such events.
Mike Larson, a financial writer, wrote recently about his trip to the DC Money Show. In it, he said that the talk was about “dumb money and smart money.” The idea behind this is that the first time the market crashed, the average investor, or the “dumb money” got caught and sold out. Then comes the demise of the “smart money,” or the guys who do this kind of thing for a living, the more skilled investors.
I can’t exactly say as I agree with this label of dumb or smart. First off, most people know darned well they have to invest in something because inflation will rob their away their cash. Most go with financial planners, who better be trained to deal with this. Finally, is it smart to pull your money out right away during the first drop and avoid that common aftershock? Maybe the dumb ones were the smart ones after all?
Most “smart” investors are hedging their portfolios with shorts or inverse ETFs, and that’s okay. However, most “smart” money are staying invested in some way. And that has to make a person wonder, if those of us who are still invested -me included- are truly deserving of that “smart” label.
